Nishant1

bchadwick, I think I am still in the middle of Financial Enlightenment I remember how my personal “investing style” (if you could call it that) has evolved over years since 1999, when I started paying attention to the stock market because all my friends were. Before that, I was dimly aware that stocks existed and that I put money in 401-K in stocks and bonds in funds that had outperformed in the past 5 years. One of them happened to be Fidelity Contrafund so even this follow-the-performance decision didn’t turn out to be that bad. During 1999, everyone was “investing”, so I bought a few tech stocks that my friends and coworkers (who didn’t know anything either) sunk their money into - like CSCO at 54, INTC at 75, JDSU at 88 - remember those? Then in the 2001-2003 recession I wised up a little bit, heard of something called the P/E ratio, and bought CVX and HSY (and HD, which then languished forever thanks to Bob Nardelli.) Looking back, luck played a major part since value was on sale. (Also, CHK, despite its CEO’s shenanigans, went from 5.41 to 63 - I got out at 39). For the last 5 years, I have been reading books such as the Intelligent Investor and listening to Warren Buffett on CNBC, so I wanted to see for myself if CFA can actually help.
One thing I am beginning to realize is what an enormous amount of work it is to analyze companies, even if you have access to ValueLine and SEC 10-K/proxy statements. Almsot as an experiment, I’ve been dividing my past and present 401-K/IRA money into individual stocks that I pick, and broard market indices (like Schwab SCHB/SCHD and Vanguard VTI) and so far, in the last 3 years, the individual stocks have beaten the indices by 2% or so. Which is pathetic considering I am not getting paid for this research (except the intellectual satisfaction.) But it’s fun, so I’d like to memorize at least the 1700 ValueLine stocks to the point where I can watch Jim Cramer’s lightning round and have some informed opinion on the stocks that his listeners ask him about. I already know I have better judgment than him I’d never advocate jumping in and out as quickly as he does.
Sorry for the long-winded post, to summarize, CFA has opened my eyes to how many facets there are to company valuation, from macro/top-down industry analysis to comparable multiples to liquidation value and so on, and then to guessing the intrinsic value of the stock, considering leverage and buybacks/dilution etc.

Nishant1

bchadwick wrote:
1recho, you brought up a point I’d forgotten, which is that outperforming indexes by even a few percent can be amazingly hard work.  I did not appreciate this before my CFA days, although my realization of this was not solely a CFA thing: it came from many sources.
Comparing yourself to indexes sounds like a smart thing to do.  Good job at trying to be rigorous. Separating your performance from market performance is surprisingly tricky to do, particularly if you start controlling for things like a stock’s beta to the market. Did you make more because you picked things better, or did you make more because your stock usually does 1.2x better (or worse) than the market as a whole?  It’s the question you want to try to answer for yourself.
its also worth remembering that you don’t have to believe all the assumptions of CAPM in order to use the SML as a returns estimating tool.  The index model simply asserts that if the market index captures the overall impact of events on the economy, beta then measures a stock’s sensitivity to these macro factors (as proxies by the market index).  That conclusion doesn’t require heroic assumptions about efficient markets, perfect information, optimizing behavior, and all those things that make CAPM suspect - in fact it is a highly plausible assumption - but it does end up with an equation that looks pretty much identical to the SML implied by CAPM.
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