What Does Your Investment Portfolio Diet Look Like?

If eliminating carbs and sugars from your diet would help you shed that spare tyre, in oh…say two weeks, you’d be motivated to commit to saying nein to that pizza and cheesecake, right? 

Wrong. 

After five years, as many as 95% of dieters will be back to where they started, and 41% will have regained more weight than they lost. One study even found that subjecting yourself to a weight-loss diet just once doubles your odds of becoming overweight in the future.

Why would that be?

When you change your eating habits too quickly, your metabolism goes “whoah, what the hell are you doing here big boy?” and promptly slows. Clinging to every kilojoule, meaning losing that spare tyre gets even harder. If you commit to anything for less than a year, you’re not giving your body enough time to adapt and establish a new habit.

Despite overwhelming evidence that this is how our minds and bodies work, you’d think that “diets” would have gone out of fashion along with bell bottoms, comb-overs, and ringing your broker to place an order… and you’d be wrong again.

The reason you’d be wrong is that we’re predisposed to easy outcomes, instant gratification, and getting something for nothing…or at least something for very little.

This is why lotteries exist.

It’s why momentum traders earn a crust. In the knowledge that people are herd animals and will follow stupid ideas even when the odds are overwhelmingly against them profiting.

Now I can understand the appeal of making a whopping great big pile of dough with simply handing over a few bucks and getting a scratchy card.

Where’s Your Appetite Leaning Towards?

The problem…if not obvious, is that what folks are doing here is looking at high-risk low probability events.

And we all know what actually works. It’s rather simple. Not sexy, but simple. You invest in low-risk high probability events. These things often tend to look boring. They’re typically out of favour…which is why risk has been reduced and it’s also why prices have been altered accordingly…downward.

Let me show you.

A company Brad and I just included in the weekly edition of Insider provides a perfect example.

Just under half the company is owned by insiders, and they’re buying back stock…and why wouldn’t they? 

ROE 46.8% gross margins of 20%. ROA 17%; ROI 32%. Earnings yields are insane. In fact, as my buddy Kuppy highlighted on this particular stock FCF (Free cash flow) buys back 5-7% of shares each quarter. This company can buy back all outstanding shares and self-fund without impairing profitability. 

Take that Tesla. And while it’s doing so, it’s still paying shareholders a 2.37% divi. As you can tell, they could easily pay out a double-digit dividend if they didn’t use that cash to buy back shares.

And even finding any analysts covering this sector is nigh on impossible. Funny how that works.

Look for Low-Risk High Probability Setups

Here’s the thing though. If I told folks what sector this company is in they’d likely give me one of those looks reserved for little children who’ve just told you they just saw a Unicorn fly past.

It’s boring, unimaginative and reliable. Kinda like tobacco stocks, I wrote about previously but you know what?

Where buying the latest “this is going to the moon” stock promoted to you by some breathless copywriter in his underwear may sound “exciting”, simply looking for low-risk high probability setups provides you with a stable of positions which may not “go to the moon” but your downside risk is far lower and your upside is decent to pretty darn good. 

And you won’t have all of them work. Yes really. Sometimes you’ll pha-kid-up. It happens, but by employing a systematic approach you won’t need that yo yo diet, where you run from one “sure thing” into the next only to find that “dieting” just makes you fatter.

– Chris

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