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This is a book that I am going to have to read often, at least annually.
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the biases and mistakes we are talking about in this book are likely to affect every one of us.
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Perfect planning and preparation prevent piss poor performance.
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“The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.
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Investing the Templeton Way:
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he often had standing orders with his brokers to purchase those wish list stocks if for some reason the market sold off enough to drag their prices down to levels at which he considered them a bargain.
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Sir John knew that on the day the market or stock was down say 40 percent he wouldn ’t have the discipline to execute a buy.
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But, by placing
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buy orders well below the market price, it becomes easier to buy when faced with despondent selling. This is a simple but highly effective way of removing emotion from the situation.
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The evidence above suggests that fear causes people to ignore bargains when they are available in the market, especially if they have previously suffered a loss. The longer they find themselves in this position, the worse their decision- making appears to become.
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The chaos is so extreme, the panic selling so urgent, that there is almost no possibility that sellers are acting on superior information;
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opportunity, a strong sell discipline, significant hedging activity, and avoidance of recourse leverage, among others.” By removing some of the sources of forced decisions during difficult times, Klarman attempts to reduce
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the illusion of control seems most likely to occur when lots of choices are available; when you have early success at the task (as per the coin tossing); the task you are undertaking is familiar to you; the amount of information
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spandrels, to borrow Stephen Jay Gould
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Observation over many years has taught us that the chief losses to investors come from the purchase of l ow-quality securities at times of favorable business conditions. The purchasers view the current good earnings as equivalent to “earning power” and assume that prosperity is synonymous with safety.
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All news is good news (if the news is bad, it can always get better). Rule 2: Everything is always cheap (even if you have to make up new valuation methodologies). Rule 3: Assertion trumps evidence (never let the facts get in the way of a good story).
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“An early mentor of mine started out during the Depression and used to always say we were in the rejection business—that we’re paid to be cynical and that a big part of success in investing is knowing how to say no.”
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Personally, I guess the best solution may be to be clinically depressed at work, but happy and deluded when you go home (well, it works for me anyway!). Chapter Four Why Does Anyone Listen to These Guys?
In addition, our species has an unfortunate habit of using confidence as a proxy for skill.
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As long as you were wrong but sounded extremely
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confident, even a poor track record was excused. Such is the power of confidence.
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In other words, the experts’ advice made the brain switch off some processes required for financial decision making.
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way in which we follow authority. When investing, we need to learn to be far more skeptical of experts and their authority.
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about the stocks in question from outside the scope of the study. This
clear example of the illusion of knowledge driving overconfidence (more
fees). Any informational advantage that high turnover individuals had was more than eradicated by the costs of trading.
in trading behavior.20 It did. Women had markedly lower annual turnover rates, 53 percent, compared to men ’s 77 percent. Women ended up with higher net returns than men.
needed their wives ’ permission to trade outperformed the single guys.
only are men bad traders, they are a bad
illustrate how hard it is to be just one step ahead of everyone else, to get in before everyone else, and to get out before everyone else. Yet despite this fact, it seems that this is exactly what a large number of investors spend their time doing—trying to be the smartest person in the room.
We need to stick to our investment discipline, ignore the actions of others, and stop listening to the so-called experts.
This whole enterprise of trying to be a financial soothsayer seems largely doomed to failure because of the behavior pitfall from the previous chapter—overconfidence.
“We simply do not know.”
Value Investing.
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All investors should devote themselves to understanding the nature of the business and its intrinsic worth, rather than wasting their time trying to guess the unknowable future.
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Bruce Greenwald
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“The greatest obstacle to discovery is not ignorance—it is the illusion of knowledge.”
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Jean-Marie Eveillard of First Eagle
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I essentially focus upon three elements: 1. Valuation: Is this stock seriously undervalued? 2. Balance sheets: Is this stock going bust? 3. Capital discipline: What is the
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management doing with the cash I’m giving them?
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disconfirming evidence is in direct violation of the principles outlined by Karl Popper, the philosopher of science. He argued that the only way to test a hypothesis was to look for all the information that disagreed with it—a process known as falsification.
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“Julian Robertson was always adamant about seeking out the opposite point of view and then being completely honest with yourself in deciding whether your analysis overrides that. That’s something we try to practice every day.”
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In this piece, Kass warns of the dangers of being a perma-bull—always bullish on the market—or a perma-bear—always negative on the market.
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The head of research at the investment bank I was working at used some of my work to show the analysts that they were always behind the curve and incite them to do better.
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people tend to underreact in unstable environments with precise signals (turning points), but overreact to stable environments with noisy signals (trending markets).
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No Bull, Steinhardt writes:
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As Joel Greenblatt has observed, one of the reasons people shy away from value investing is that the stocks you consider have poor stories.
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The straight line extrapolation of growth forecasts is a classic sign of trouble ahead in real time.
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Focusing on the cold hard facts (soundly based in real numbers) is likely to be our best defense against the siren song of stories.
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investors get caught up in all the details and the noise, and forget to keep an eye on the big picture.
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