Investment Notes #30
My five investment takeaways (Part I)
Welcome back to the Hidden Value Gems newsletter!
This is my first post in about six months. I took a break from writing to explore fund launch options and focus on several private projects. While the pause was useful, I realised that I missed engaging with readers.
So, I decided to get back to writing, although not on the previous schedule (probably one or two articles a month).
During my time away from writing, I have been reflecting on investing—thinking about what made some of my investments successful and why I failed in other cases. While there are many lessons, I have identified five themes that stood out most clearly.
I will be sharing them as separate posts over the coming weeks.
Today, I start with the first theme.
Theme I: Ignore general markets, focus on individual opportunities
Being right or making money
Every year, there is plenty of talk about bubbles and imminent market corrections.
Not surprisingly, empirical research shows that negative language and headlines attract disproportionate attention, and that commentators emphasising downside scenarios are often perceived as more knowledgeable—even when their forecasts are no more accurate than neutral or positive assessments. ¹ ² ³ ⁴
There is no point in denying that US stocks are currently expensive and highly concentrated, while persistently high budget deficits and continuously rising federal government debt pose serious concerns (not to mention the odd geopolitical developments currently unfolding).
But expensive stocks do not lead to immediate market crashes, as was evidenced last year (yet again). Getting scared and selling out of stocks would not have been a winning strategy in 2025.
Moreover, even if things had turned badly last year and you were lucky enough to exit the market early, how would you know when to get back in?
Essentially, investors fearing a market crash face a choice: being right every 5–10 years (and missing many years of market growth), or enjoying long-term capital appreciation while paying the price of temporary (and often short-lived) declines in portfolio values.
If you sell down your positions or materially reduce exposure, you double your timing risk: first by leaving the market too early, and second by failing to re-enter at the bottom.
But does this mean that you should ignore valuations altogether? Of course not. So here is what I usually do.
1. Downside risks first, upside case second
The longer markets rise, the more optimism becomes embedded in stock prices. In such an environment, I make a conscious effort to remind myself of the inherent risks.
When I analyse a new stock or decide what to do with an existing position, I start with the downside scenario and think about what could possibly go wrong.
2. Leverage
I then check the company’s leverage. Apart from the simple net-debt-to-EBITDA ratio, I consider potential funding needs, interest payments relative to operating and free cash flow, the cyclicality of the business, and the share of fixed costs.
Looking at off-balance-sheet liabilities is also critical, and admittedly something I should check more often—for example, non-consolidated entities with additional leverage, future spending commitments, potential claims or ongoing litigation, and temporary tax reliefs that improve reported cash flow but are not recurring.
3. Am I extrapolating above-average growth and peak margins?
Another risk I pay attention to is the assumptions used to estimate a stock’s fair value. After a prolonged bull market, 8–10% top-line growth and expanding profit margins can begin to feel “normal.”
However, historical evidence shows that sustained high growth is rare and poorly persistent, and that stocks with the most optimistic long-term growth forecasts often underperform—consistent with optimistic bias in valuation models. ⁵ ⁶
4. Am I being sold a blue-sky scenario?
I also try to take a critical view when listening to management’s comments and guidance, and always cross-check words against actions.
Does management allocate capital wisely, or are results simply supported by the cycle or other factors (government subsidies, currency moves, or one-off effects)? Are peak margins being extrapolated? Have future capital requirements been fully considered?
5. More dry powder
Some investment legends, like Peter Lynch, preferred to remain fully invested to minimise timing risk. Others adjust their cash positions depending on market conditions. Some investors follow a highly systematic approach to cash allocation and position sizing, guided by strict rules.
I am less disciplined, but I prefer to hold a bit more cash than usual at times like this—around 10%, or potentially more.
The source of that cash is typically companies offering the lowest upside or carrying the highest risk.
This extra cash buffer reduces volatility, but more importantly, it allows me to take advantage of falling share prices. The easiest money is often made during crises—but only if you have the cash available. Trimming the least attractive positions helps ensure that flexibility.
A final point
While the overall market may be expensive, there are still pockets offering attractive value or growth.
Last year, for example, several Asian and European markets outperformed more expensive US equities. Beyond that, there are niche sectors and companies—such as parts of the mining industry, particularly copper, silver, and gold—where valuations and fundamentals remain compelling.
This is all for today. In my next post, I will share how I ended up investing in severl commodity stocks last year, including buying silver stocks and what lessons I learned from it.
Thank you for reading,
Ildar
Footnotes
C. E. Robertson et al., “Negativity drives online news consumption,” Nature Human Behaviour (2023).
“A negative headline makes it more likely you’ll click,” Harvard T.H. Chan School of Public Health (May 2023).
Teresa M. Amabile, “Brilliant but cruel: Perceptions of negative evaluators,” Journal of Experimental Social Psychology (1983).
K. Wu et al., “How buyers perceive credibility of advisors.” Springer (2015).
Chan, L. K. C., Karceski, J., & Lakonishok, J., “The Level and Persistence of Growth Rates,” Journal of Finance(2003).
Bordalo, P., Gennaioli, N., La Porta, R., & Shleifer, A., “Diagnostic Expectations and Stock Returns,” Journal of Finance 74(6): 2839–2874 (2019).