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The Intermission: An Insight into the Four Pillars of Fragility and the Antifragile Portfolio
I write this to inform you of an upcoming hiatus in my weekly posts for the next 4 to 6 weeks, due to personal obligations that require my full attention. During this period, I invite you to revisit my previous pieces in the Fragility Series, accessible here: Fragility Analysis (budgetiger.in). This series dives into the crucial aspects of investment fragility every investor should understand to effectively safeguard their equity portfolio. By adhering to these guidelines, you can better shield your investments from unfavorable developments, thereby maximizing the benefits of positive news.
The four pillars discussed in the Fragility Series include:
Steering clear of Fragile Companies: This requires an in-depth review of various financial indicators to determine a company's fiscal wellbeing and growth potential. Key metrics to consider include equity as a percentage of balance sheet size, breakeven sales as a percentage of actual sales, Return on Capital Employed (ROCE), and cash flow from operations compared to annual debt obligations plus depreciation, along with a comprehensive review of the company's industry, sales, and profit growth. For more information, refer to my articles:
Shunning Overvalued Companies: This necessitates evaluating valuation metrics such as the Price-to-Earnings (P/E) ratio and the Price/Earnings to Growth (PEG) ratio based on past and future earnings growth rates. The objective is to bypass companies with inflated valuations that are likely to be adjusted if the company fails to achieve projected growth targets. Read more on this in:
Avoiding Companies with Management Exhibiting a Fragile Mindset: This involves scrutinizing management behaviors including their funding strategies, cash reserves, surplus cash distribution, commitment to long-term growth versus short-term stock price valuations, frugality, and inclination towards debt. It's also critical to ensure no significant adverse findings are associated with the management or the company. You can find more in my article:
Evading Shorter Timeframes: This encourages long-term investing (5 to 10 years or more) and patience during market downturns, as well as the maintenance of sufficient contingency funds to avoid premature withdrawal from equity investments in a bear market. Discover more in my post:
By diligently implementing the above pillars, you can reduce the severity of negative news and allow favorable news to substantially enhance your portfolio. I have also provided a consolidated checklist encompassing all these pillars, aimed at guiding investors towards effectively eliminating investment fragility.
However, it's a common misconception to consider 'robust' as the antonym of 'fragile.' Yet, the true opposite of fragility is 'antifragility.' I have previously elucidated on this concept in my post titled How to build an Antifragile Portfolio (budgetiger.in). The four pillars predominantly focus on mitigating fragility in the portfolio, which inherently implies reducing downside risk or drawdowns. Yet, what about the upside? While eradicating downside risk contributes to a robust portfolio, how do we transform it into an antifragile one? I intend to explore this in my forthcoming posts once I return from my break.
Thank you for your understanding and continuous support. I look forward to reconnecting soon.