133 - How to Solve the Dead Money Problem?

Mental Models discussed in this podcast:

• Dead Money
• Opportunity Cost
• Time is Money
• Intrinsic Value
• Compounding

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Show Outline

The Dead Money Problem and Solution

• “If you remember only one thing today: Time is Money” 
• What is Dead Money? 
  • Any asset you own that is not growing intrinsic value over a period of time. 
  • The focus here is on the fundamentals of the business. NOT the stock price. We can’t predict stock prices. We’re not going to try.
• Why is this a problem? 
  • The longer you hold a dead money position the worse off you are.
• Principle: Time x Position Sizing x Expected Return of Alternatives = Lost value 
  • By using this formula you can anticipate how much exposure you have to dead money losses.
• The Solution: 
  • The impact is large (Big “lost value” bucket) [>> 1%]
  • The likelihood of success is high (Big difference in expected return between opportunities)
    • At least 10%
  • Passivity is better than action. Action leads to errors. Always remember that you had good reasons for your original buy decisions.

Summary:

Time is Money! Investors lose value on any asset they own that is not growing intrinsic value over time. This episode provides value investors with my solution on how to optimize their portfolio in the face of dead money assets and potential opportunities