Numbers Don’t Lie, But They Can Be Dressed Up
Seeing Beyond the Shine of Financial Glamour. The Real Face of Returns.
Hello, StockStars!
Behind every glittering facade lies a raw truth; the truest beauty isn’t in the makeup but in the authentic details beneath.
If you’re new here, a warm welcome from my side! If not, you know what to do.
I’m Michael and on a mission to make beating the stock market as easy for you as choosing your favorite ice cream.
Last year, I started on a wild journey to write an algorithm that does exactly that.
Read the full story here.
If you know me personally, you know one thing
I’m not the guy who sugarcoats things.
I call things by their names. And since money is a serious topic, I won’t change that.
But what is life without humor?
Imagine being attracted to a Victoria’s Secret model, only to wake up next to...well, not exactly what you’ve remembered. You’re pinching yourself in disbelief because she either had a bit too much makeup on or maybe you had a few too many happy hour cocktails in.
The dream is over - you see the rough reality.
That’s why I don’t drink and that’s why my lovely wife doesn’t wear makeup. What you see is genuinely what you get. It’s like a refreshing cold drink on a hot day—simple, unadulterated, and so good. The deeper you know a person, the better it should get.
There are lots of ways to doll up an investment strategy to look like a hot, graceful Victoria Secret model. And when you’re in it, it feels like you are stuck in the wrong marriage.
Underneath all the glitz, you might find yourself in an investment “relationship” that feels a bit... off.
I want my investment numbers as real as my morning coffee—strong, straightforward, and no fluff.
What does that mean?
Since there are ways to “boost” return numbers artificially, I’ve decided to not do that.
Instead, I’ve changed the way I calculate the annual returns.
In the past, it was straightforward—add ‘em up, divide by the years.
Moving forward, we’re going to use the “Compound Annual Growth Rate” (CAGR).
Think of this formula as the natural beauty in a world full of filters.
What you see is what you get.
Here is what we are also all interested in.
The moment of truth: the unfiltered - all-natural - naked look.
Yes, you can see a drop of around 3%, but when you are an eagle-eyed, long-term reader, I bet you’ve noticed something else as well.
Michael?! What’s that?!
Yes! I’ve cracked the pot and taken the annual 20% hurdle! At least the old way.
And that brings me to what I will do next to crack it the new way.
The keyword: Parameter Optimization
What does that mean in simple language?
Before we talk about fancy Parameter Optimization, we have to understand what we are doing. And why we are doing it.
Have you ever tried to recreate your grandma’s secret recipe, but because you haven’t written it down, you either forget half the ingredients or throw in a few extras and it’s only getting worse?
Frustrating, right? The recipe is lost in space forever because there are just too many ingredients aka variables to be adjusted.
Quant investing can feel the same way.
Take shareholder yield, for instance
Shareholder yield combines three things:
Dividend yield
Share buybacks
And (net)-debt repayment
It measures the total return provided to shareholders (you) and shows the percentage of capital given “back” to investors (you) through dividends (this is the only real money you get here), stock buybacks, and debt reductions (both increase the value of a company).
The higher the Shareholder Yield, the better it is for us. Nice!
So far, so good.
But what if a company is not paying any dividends?
Or what if it increases the share number on the market and dilutes the shares you own?
Or what if it increases debt and increases dividends because it took the loan?
You can spin even more scenarios.
It sounds confusing because it is complex
This is where AI can give us a helping hand with Parameter Optimization. It literally tries out every combination for all the variables you give it.
There are two downsides.
Number 1: It might take ages.
Number 2: After it’s done, you still have to look at it and understand the results. AI is not helping you here.
Why is that important?
The tip of the iceberg.
If a small business repays a large loan relative to its market value, what’s the story behind that number in the overall picture?
If you have no context about other numbers, chances are high that we don’t understand the story’s language.
It’s like a mosaic that only makes sense when you zoom out to get the full picture.
Progress:
See above 😊
Today I got new baseball caps. After the stitching is done I’ll show it to you.
Plans:
Parameter Optimization Time
I’ve started with the flight theory book and it’s fascinating!
Did you know that Jeana Yeager and Dick Rutan made the first flight around the world non-stop? The plane needed a 15,000-foot runway for take-off. And when it took off, there were only 800 feet left! Why such a long approach?
They had 7,001.5 pounds of fuel on board. 72.3% of the whole aircraft! I quote Jeana. “If it would be easy, it would have been done before.” The flight took them 9 days, 3 minutes and 44 seconds.
Breaking new ground is never easy. Writing this program feels the same for me.
Where’s my head:
This entire project feels like I’m constantly jumping up and down the pyramid below.
We all have different levels in all areas of our life. You can’t be on stage 4 in all areas at the same time.
Here is what helps me.
It’s important to be conscious that these levels exist.
Get aware of a “stage-1-entry” as fast as possible.
How? Turn off your ego and be brutally honest with yourself.Stage 2 sucks the most because that’s where you fail the most - but you also learn the most. (Finding the right header pic for this arcticle sucked a lot this time.)
It’s normal to suck at this stage - it’s a good thing.
Watch this for another angle —> click and get wiser.
Bottom line: The higher you get, the easier it becomes.
(The Dunning-Kruger Effect is another way to look at it.)
Smash that heart button if you see beyond the financial makeup!
That’s it for today.
Until next time StockStars!
Michael
If you think somebody should read this, be a good human, share it, and make them happy
Disclaimer:
The information in this article is my personal opinion. I’m not a certified investment professional. It is not consulting, nor does it constitute investment recommendations.
I do my research carefully and follow my personal investment strategy.
The stock market is a complex building with its own rules. There are no rules set in stone, like the rules of physics.
Therefore, use the contents of this newsletter at your own risk and do your own research as well. Investing in the stock market can lead to a total loss of the capital invested.
You make finance fun! I think that qualifies as a level 4 competence in substacking :))