Where research gets a re-visit

 Alright Dad, I think you have had a nice break since our last session ( Part 1 ). Do you have any questions before we proceed further? Dad: Nope, I think we are good to go forward. Okay...! Let's move to the rather more interesting part. Today, we are going to take what we had learned in the last conversation and move our discussion towards independent risk factors and their role in forming an optimal portfolio. But first let me ask you some questions regarding discount rates, just to make sure we are on the same page..! Tell me, if you are paying less for an asset's future profits, the implicit discount rates shall be more or less? Dad: Let me see....If I were to pay less for any future cash flows because I think it is risky, this means my expected return going forward is higher. This further means that the discount rate that is embedded into this little framework is going to be higher.  You are absolutely right..! The less you are willing to pay, you are implicitly discount...

 A couple of days ago a colleague of mine happens to ask me about the so-called "factors" that I keep referring to every now and then. When he asked me that question, I was a bit confused. Not because I didn't have a detailed understanding of the topic. But because of the fact that he did not have a finance background. Hence, as soon as he asked me that question, I immediately started thinking, "What would be the simplest and best possible explanation regarding these risk factors that will not require any sorts of preliminary understanding of financial theories?". After thinking for a while, I think I have come up with an answer. I am going to structure this piece like Plato's dialogue and take the role of Socrates (no, I am not wise like Socrates, but let me have my moment alright!). Also, the other party in this dialogue, my dad is a businessman so he does have a basic understanding of things like sources of capital (debt and equity), managing leverage, et...

I come from the school of value investing. The idea of finding bargains and paying less compared to what it is worth excites me. In the light of the long storied success of value investing, some of its big proponents like Warren Buffett, Howard Marks, Monish Phabrai, etc. like to frequently point out to the general investing public that you should not fear the volatile markets and the effect that it is having in your portfolio. Well, right there, I have a problem. I know what they are trying to say and what the rationale behind that perspective is. The idea is that if you have done a deep fundamental analysis about a certain company, you do not need to worry about the daily fluctuations. Even if the stock price drops 20 percent in a short period of time, you should not take any action. In fact, some might even go on to say "If that happens, you gotta buy more because it is now cheaper than what you had previously paid!" Most of the stock-picking value investors also would not...