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The DIY Investing Podcast

Do you want to learn how to manage your own investments? Are you ready to stop paying investment management fees and start building wealth? The DIY Investing Podcast is dedicated to providing you with the knowledge, skills, and resources you need to be a better investor. Learn how to make investments through the use of fundamental analysis, mental models, and business management insights.

 

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  2. 81 - Always Ask Why: Bond Returns, Greater Fool Theory, and the 5 Why Framework

81 - Always Ask Why: Bond Returns, Greater Fool Theory, and the 5 Why Framework

Jun 28, 2020

Mental Models discussed in this podcast:

  • Discount Rate
  • Greater Fool Theory
  • Circle of Competence
  • 5-Why Framework

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Show Outline

The full show notes for this episode are available at https://www.diyinvesting.org/Episode81

Bond Returns

In the aggregate, bond returns cannot exceed the coupon rate of the bond. Your interest rate earned sets the maximum expected rate of return on that investment. Any potential for gains above this threshold is purely speculative in nature. 

Greater Fool Theory

  • In today's bond bubble, the only way to justify purchasing bonds in a portfolio is a dependence on the greater fool theory. 
  • If you want or expect high returns from your bonds, then you hope that others are foolish enough to buy them from you before they mature. 

Circle of Competence

Your circle of competence is probably smaller than you think.

5-Why Framework

This framework is used in the industry to evaluate failures for a root cause analysis. Basically, don't stop with understanding a problem after only asking "Why?" once. You need to dig deeper. Ask "Why?" five times, to reach down to deeper levels of explanation. 

Find the root cause of a problem, not simply the surface contributing causes. 

Summary:

Investors should always ask why when evaluating investments. This includes understanding the underlying reasons for their investing strategy, why they earn an excess return, and the edge of their circle of competence.