Day 3: Max(Return) “Double Your Money”

 

In economic terms, a high return means the investment’s gains compare favourably to its cost. Here are a few constructive suggestions that will give an insight about improving your returns:

1. Consider the key drivers of returns (MC, ROI, ROE, ROA, EBITDA, EBITDA Margin, Gross Profit, Gross Profit Margin, Net Profit, Net Profit Margin, Operating Margin, TSR, EPS, PER, PEG, DGR, DY, PBR, DCF, PFVR, etc.) will help you to pin point your KPI’s that will give an insight about improving your financial health;

2. By buying investments at different times, you spread your risk - this makes you less sensitive to price fluctuations in the longer term; for example, with dollar cost averaging (DCA), you invest the same amount each month, regardless of how the markets perform; this means you buy more shares when prices are lower and fewer when prices are higher;

3. Get serious about investing in different areas that would each react differently to the bull market (smart portfolio diversification) - this is “the only free lunch”;

4. Statistical testing of the random-walk theory via variance ratio (VR) applied to historical data can answer the key question - do past stock-price changes enable one to forecast future price changes? 

5. Optimize stock-to-bond ratio by moving some of your money from bonds and cash into stocks over the long run;

6. Choose riskier binds by using more corporate bonds and extending the duration on your bond portfolio;

7. Ideally, You should fill your portfolio with assets that all have high expected returns but very low correlation with each other, e.g. new securities that offer a decent rate of risk-adjusted return and have low correlation to your stocks and bonds.

The Bottom Line:  

If you want to get ahead of the financial curve, you want to ensure you maximize your risk-adjusted returns. While you can’t guarantee how the stock markets will perform, you can control your actions in a consistent manner. 

Comments

  1. VA DigHiSciFebruary 4, 2022 at 9:43 AM

    This is a maximum return brain storming session in that you need to find all possible ways to maximize your potential returns for a given level of risk or volatility. Always measure returns in risk-adjusted terms. When we measure returns, there are three approaches: the absolute point-to-point returns; benchmarked returns, either to the peer group or to the representative index like the Nifty; risk-adjusted returns. The latter is the most appropriate approach and a key takeaway point of this guide. Indeed, measures like Sharpe/Treynor can help you measure how much returns will be generating without adding to your risk. Your ultimate aim must be to maximize your risk-adjusted returns on your investments.

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