Saturday, June 21, 2014

The 4 main investment categories: Game Changers, Cash Gushers, YOLOs and Condoms.

To make the process of constructing or reconfiguring a portfolio simpler, I think of the portfolio in terms of its exposure to the 4 main investment categories: Game changers, cash gushers, YOLOs (you only live once) and condoms. In this article, I will be explaining these investment categories.

Game changers are generally top quality companies with durable competitive advantages which allow them to achieve superior returns on capital. However, unlike companies like McDonald’s or Apple which have a wide economic moat and generates high returns on capital, game changers still have a lot of opportunities to reinvest profits and grow their business. In short, game changers are companies that have the potential to become the next Starbucks or Berkshire Hathaway. It may be difficult to identify companies in this category. And even if you do find such companies, they may be trading at a rich valuation. However, investors should be patient in trying to build up this category of their portfolio. An investor could potentially move up a notch or two in life by buying a game changer at a reasonable price and holding it for the long-term, hence the term game changer.

Cash gushers are investments that have healthy income yields. The purpose of this category of investments is to provide you with a stream of cash to reinvest and expand your portfolio. It’s important that your cash gusher investments are able to maintain decent income distributions during a crisis as that’s when you will need cash the most to take advantage of bargains. Some examples of cash gushers are REITs, high dividend paying blue chip stocks, rental properties and private businesses.

Condoms are positions that give your portfolio some protection when shit goes down. I call these positions condoms because whenever I think of risk management, I think of a couple who don’t want to have kids and use a condom to prevent the risk of conception (because having the dude to pull out before he cums is too risky). The main asset in the condom investment category is of course cash. The investor can use his cash to buy up assets during a market downturn when they’re cheap; this will of course improve the investor’s odds of coming out ahead when the market recovers. If the investor uses leverage, he can dip into his cash reserve to in the event that the cash inflows of his portfolio drop below the cost of servicing his debt. Another asset that falls in the condom category is gold. Gold is thought of by a lot of people as a safe-haven asset and could help with maintaining some of your portfolio’s real value if really fucked up things like hyperinflation occurs. Short positions can also be considered as a position that falls into the condom category. An investor’s short positions are likely to go up in a recession; she can then liquidate her shorts and use the proceeds to go long on undervalued assets. I personally never took a short position in my life and know next to nothing about shorting. But it is something that I’m interested in learning more about.

YOLOs are investments that you won’t normally make but are attractive as they’re trading at stupidly low prices. Some examples of YOLOs are mediocre stocks with deep discounts to intrinsic value, undervalued distress debt, and commodities trading at below their cost of production. Investments that fall into the YOLO category are not meant to be held for the long-term and should be sold once they are no longer selling at stupidly low prices. Investors should allocate only a small percentage of their portfolio to YOLOs as this investment category can be riskier.  

As always, thank you for reading. I’m sorry if I haven’t analyzed any stocks recently, I know that’s the main reason you guys read my blog. It’s just that it’s very difficult to find attractive investment opportunities in this market as most of the stuff are either overvalued or fairly valued. Please e-mail me or drop a comment if you think there is an interesting stock that I should analyze. Take care and stay rational.

1 comment:

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