Warren Buffett is famous for talking about the 'intrinsic value' of stocks. But while many people parrot this phrase, few know what it really means.
There's something we calculate called an alpha, and that's the stock's return that's independent, uncorrelated to the market. And the only way you really get a high alpha is for something to zig when the market zags.
Beta and modern portfolio theory and the like - none of it makes any sense to me.
You can measure opportunity with the same yardstick that measures the risk involved. They go together.
People need to take a little bit more risk.
If I'm a bank, and I'm making risky loans, I have an incentive, if I can, to make those loans using other people's money: in other words, to make highly leveraged loans.
Investment decision should be made on the basis of the most probable compounding of after-tax net worth with minimum risk.
There are some risks we choose to take because the benefits from taking them exceed the possible costs. Optimal behavior takes risks that are worthwhile. This is the central paradigm of finance: we must take risks to achieve rewards, but not all risks are equally rewarded.
Now quantitatively we rank things on something called alpha over standard deviation, which is the return independent of the market divided by volatility. Usually, to get a high ranking, you need some buying pressure.
Stock price multiples are negatively correlated with real interest rates. As interest rates rise, the market multiple will fall.
