Zero-Investment Portfolio

  

A zero investment portfolio is more of an academic pipe dream than it is a reality. That’s because, in the real world, it takes money to make money. But the zero investment portfolio is the hypothetical idea that you can have a portfolio that requires no equity. It’s the idea that all investments have a net value of zero, because money from one area (say you have $100 from short selling some stockaroos) is used to purchase the same amount ($100 in this case) of stock from somewhere else.

In its most common form, it’s buying and shorting equal amounts of securities, so that, hypothetically, you don’t need any additional input. But things like SEC rules, commission fees, and using proceeds as collateral for loans...all make this more folly than funsies in real life.

Don’t get us wrong...people still do strategies like this that work for them, but it’s not really a zero investment portfolio with all these real-life-hoops-of-fire investors must jump through. Welcome to the danger zone.

Related or Semi-related Video

Finance: What is Beta?22 Views

00:00

Finance allah shmoop What is beta it's Volatility That's it

00:07

here's a stock chart reflecting the performance of a highly

00:09

volatile stock plus size manikins ink and here's A teen

00:13

t stock chart The last twenty years Yeah Whole lot

00:16

less volatile Eighteen t stock has left beta then p

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s m so here's p s m mapped over the

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s and p five hundred Gopi sm is about twice

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a cz volatile Is the market here like on days

00:28

The markets up one percent p s m is up

00:31

two percent on days The markets down four percent p

00:33

s m is crushed down eight percent So you'd say

00:36

it has a beta relative to the s and p

00:38

five hundred of two point Oh or two acts So

00:41

the hammer this home let's do advanced math here So

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if any given day the marks up one point two

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percent has bit of two point Oh you'd expect p

00:48

s m to be up two point four percent and

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same deal on the downside Yeah All right So what

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gives a company high beta Well simply put uncertainty Some

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companies have products in the pipeline Where the broader market

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has a lack of certainty that buyers by the millions

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anyway will want that product sort of the opposite of

01:07

coca cola Like what are the odds that buyers will

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still want diet coke next year Yeah pretty good odds

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but plastic manikins modeling extra large kimonos away Less certainty

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So the company may end up awesome and ruling the

01:21

world Or it may end up being melted down for

01:24

spare parts Yeah Making newsman drone helicopter thing right Well

01:28

what else creates beta Well leverage or debt Some companies

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have tons of cash Others have tons of debt of

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company a is trading for one hundred bucks a share

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and it has no debt and ninety five dollars a

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share in cash Will The market is valuing the operations

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of that company and only five bucks a share So

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the operations could do awesome Or they could do terrible

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and nobody's going to care Big web stock goes to

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one hundred hundred five Ninety five Something like that big

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No big deal So yeah i think about that The

01:58

value The operations could increase one hundred percent and be

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worth five dollars more than the company's worth one hundred

02:04

Five bucks No big deal All right but what about

02:06

company b It has one hundred million box in ibadan

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or cash flow or cash earnings and five hundred million

02:13

dollars in debt Well it trade today at eight times

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ebitda calculated as eight times that hundred million figure Then

02:20

subtracting the five hundred million dollars in debt Well the

02:23

company would be valued at three hundred million dollars That

02:27

would be its market cap But what if it's new

02:28

product is likely to be loved and people get excited

02:31

about it and its operation suddenly get valued at twelve

02:34

times even thought instead of just eight While the math

02:37

goes like twelve times than one hundred million in cash

02:40

flow for one point two billion then you subtract the

02:43

five hundred million dollars in debt And that gets you

02:45

a market value for the whole company of seven hundred

02:48

million dollars So think about it The multiple of even

02:50

da being paid by investors went up just fifty percent

02:53

from eight to twelve But the stock market value of

02:56

this company went up well over one hundred per cent

02:58

In fact one hundred thirty three percent Why so much

03:01

More volatile or so much more beta Yeah leveraged debt

03:04

gasoline on the fire It can be great but when

03:08

things go the other way it can leave you feeling 00:03:10.49 --> [endTime] you know like a dummy

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