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Value investing still works in the long run

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Despite proclamations in popular media that value investing is dead, mostly referring to the performance of stocks with low price-to-earnings or price-to-book ratios, the three-step value investing process – searching, valuing and buying only the truly undervalued stocks that meet the margin of safety requirement – works in the long run.

There are two forces that interact to provide opportunity for value investors: Human nature and the conflicts of interest that portfolio managers have when they manage other people’s money. Let’s briefly review how these two factors skew stock prices, helping those who are able to overcome these biases, to outperform.

First, weaknesses in human nature:

  • Nobel Prize winner Daniel Kahneman, through experiments, demonstrated that humans are not rational, in the sense that they tend to become risk averse when they win and risk-takers when they lose. The implication of this for investors: They tend to sell their winners too early and hold on to losers for too long.
  • Investors use past performance as an indicator of future performance and so they naively extrapolate past trends. In other words, humans are momentum traders, buying winning stocks and selling losing stocks. This behaviour leads to overpricing of winners and the opposite for losers.
  • Humans tend to be overoptimistic and overconfident about their abilities. We see this in every aspect of human life – it is part of our DNA – but when this behaviour manifests itself in investing, people tend to become market timers and day traders.
  • Investors tend to overreact both on the upside and downside. That is why bull markets tend to be stronger and bear market tend to be weaker than they both should be.
  • Investors interpret accidental success to be the result of skill. And when they bet the farm, they lose.
  • Humans are social animals and they like to be in groups. So they herd. If the crowd goes in one direction, they think the crowd knows something and they follow suit.

Second, institutional biases:

  • Portfolio managers are the worst offenders when it comes to herding, as very few have lost their job because of average performance. Meaning, they herd to protect their jobs.
  • Analysts also herd. The low-ability analysts hide in the crowd while the more reputable analysts, who have already made a good name for themselves, are hesitant to take chances.
  • Portfolio managers rebalance their portfolios in a systematic way throughout the year. Every January they take riskier positions than their benchmark in an effort to beat it. Later on in the year, as they earn what they think will give them their Christmas bonus, they lock in returns by selling their riskier stocks and load up on safer stocks or go back to benchmark weights.
  • Portfolio managers also window-dress. Toward the end of the year, they sell losing and unglamorous stocks and load their portfolios with winning and glamorous stocks in an effort to spruce it up so that when they send their clients their annual reports they see only good and winning stocks held by the portfolio manager.

The interaction of such behaviours causes stock prices to deviate significantly from value, not only over the longer term, but also within a year. For example, portfolio rebalancing is the cause of the “January effect” and “sell in May and go away,” and human nature – of both individual and institutional investors – are behind the causes of bubbles in asset prices.

So you want to be a good investor? First, you need reasonable intelligence; second, you need to understand businesses, have a good analytical framework in making buying/selling decisions, do your homework and have a long term perspective; and third, you need firmness of character – while some people are lucky to be born with it, others need to hone their character and train themselves to overcome human weaknesses.

You can be the best stock screener and best valuator, but if you get greedy, or panic, or get impatient, if you are undisciplined or do not do your own homework, you will never be a good investor.

George Athanassakos is a professor of finance and holds the Ben Graham Chair in Value Investing at the Ivey Business School, Western University.

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How much capital should you raise in your next investment round? – Entrepreneur

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Many are the questions that an investor needs you to answer; some of the important ones and that, usually, are not dominated by the entrepreneur.

October
21, 2020

4 min read

This article was translated from our Spanish edition using AI technologies. Errors may exist due to this process.

Opinions expressed by Entrepreneur contributors are their own.


  • A Venture Capitalist wants to see how much capital you are raising, how long it will last, and what they are going to do with it.
  • Do not leave aside the following questions: What would you have to achieve the next time you go out to raise capital? Will it be enough for another VC to show interest?

Usually before making a formal appointment with a Venture Capital (VC) investment fund, there is a prior conversation with an investor. However, even if the first contact is a chance meeting between you, you should be prepared for any kind of questioning about your project. If for some reason you are not able to answer, think that you are closing the doors, you will probably miss the opportunity to receive a next appointment and therefore an investment.

Many are the questions that an investor needs you to answer; some of the important ones and that, usually, are not dominated by the entrepreneur. Some of them are related to the (real) valuation of your company, the amount of money you intend to raise and what you are going to use it for, or specific answers about your financial analysis.

There are many things that investors are looking for when reviewing your deck , but beyond knowing your income, margins, CAPEX, you should also pay attention to cash in, cash out and company milestones. In short, a Venture capitalist wants to see how much capital you are raising, how long it will last and what they will do with it. The data that you must provide must be realistic, justified, since it is part of the risk that an investor assumes with you.

Image: NeONBRAND via Unsplash

Cash In

It is the money you want to raise and your Venture Capitalist seeks to make it reasonable. For this, at G2 we recommend asking the following questions: Are you raising the appropriate amount of capital in relation to what you want to achieve? In relation to the size of the team? In relation to your needs? We recommend you think in periods of between 12, 18 or 24 months. Don’t ask for more than you don’t need, implement a solid plan to strategically execute your company. Generally, these types of suggestions will not give them to you, they will simply let you know that they are not interested in your company.

Cash out

It basically refers to when your company runs out of money. Generally, you are expected to raise capital for 12, 18 or 24 months. But, if your runaway is much shorter, allow enough time to lift your next round so that you don’t run out of money. It is recommended that you do not draw up a plan to be financed for more than two years, maybe three. What investors hope is that the capital they bring you will begin to bear fruit, since what the funds seek over time is an exit strategy with a much greater value that will generate the expected returns of what they once invested.

Many VC mutual funds will lead one round and will likely approach you with other funds for subsequent ones. So do not leave aside the following questions: What would you have to achieve the next time you go out to raise capital? Will it be enough for another VC to show interest? Will the milestones reached be enough for a VC to pay a higher price in your next round of funding? Have you progressed enough?

Creating a capital raising strategy is not a simple task, it requires the accompaniment of an expert who knows how to implement one suitable for the needs of your company, guarantee that your numbers are correct and that it is linked to the appropriate investment funds for your next rounds. May your round of capital raising be flawless!

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BC Liberals promise $2 million investment in McAbee Fossil beds – Ashcroft Cache Creek Journal

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BC Liberal candidate Jackie Tegart has announced that $2 million from the Liberals’ Rebuild B.C. plan has been earmarked for the development of the McAbee Fossil Beds as a tourist destination.

The McAbee Beds are located east of Cache Creek on the Trans-Canada Highway, and are internationally recognized as the most diverse site known in British Columbia for plants and insects of the Eocene Epoch from 50 million years ago.

In 2012 the beds were declared a heritage site by the provincial government and closed to the public. In 2017 a working group of volunteers secured funding to develop a business plan for the site, which set out a phased approach to develop a world-class interpretive and research centre at the globally significant site, which could attract up to 50,000 visitors each year.

The McAbee Beds were recognized with a “Stop of Interest” sign and reopened to the public in the summer of 2019. The COVID-19 pandemic halted plans to open the site again in 2020, but work on a trail system for visitors began in September, with the hope of welcoming visitors again in 2021.

The BC Liberals recently announced their $8 billion Rebuild B.C. plan, which includes increased funding to accelerate infrastructure projects to meet the needs of the province’s growing population, create jobs, and improve long-term productivity. The McAbee site has been recognized for the enormous potential it has as a centre for education, research, and tourism, and the Liberals say that investment in it would put people to work immediately as the site is developed, and for years to come as the centre becomes operational.

“This site is of interest to researchers, students, and visitors,” says Tegart. “Investing in developing McAbee as a tourist destination will create jobs and allow more British Columbians to safely visit and spend time in our community.”

BC Votes 2020Election 2020

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Investment of $550-million will build 20 new schools, expand others: province – durhamradionews.com

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Over the next year, 20 new schools will be built across Ontario and eight existing schools will see state-of-the-art permanent additions.

That’s according to the provincial government, who are investing $550-million in the project, which is expected to add nearly 16,000 new learning spaces and 870 new licensed child care spaces over the 2020-2021 school year.

“Our government is doing everything possible to ensure our students can achieve lifelong success,” said Premier Doug Ford. “That’s why we made a significant commitment to fix our schools and ensure students and staff have access to the best classrooms, with features like modern ventilation systems and high-speed Internet access. During construction, these projects will create hundreds of jobs and contribute significantly to our economic recovery.”

Some schools will also be getting upgrades to enhance their facilities and add more student spaces.

“This government firmly believes that all children deserve to learn in state-of-the-art, modern, technologically connected and accessible schools,” said Education Minister Stephen Lecce. “We will continue to take action to ensure students are safe today and well into the future by approving more new school buildings and permanent additions, and increasing access to child care for working parents.”

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