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August 17 - August 22, 2018
By three methods may we learn wisdom: First, by reflection, which is noblest; second, by imitation, which is easiest; and third by experience, which is the bitterest. —Confucius
If there is one takeaway, it's that investing is extremely difficult. You will make mistakes. You will repeat them. You will discover new ones. And just when you think you've got it all figured out, the market will humble you once more. It is imperative that you take this in stride, that you don't let these molehills turn into mountains. Once your brain gets poisoned with negative thoughts, it's very difficult to disinfect.
The most important thing successful investors have in common is worrying about what they can control. They don't waste time worrying about which way the market will go or what the Federal Reserve will do or what inflation or interest rates will be next year. They stay within their circle of competence, however narrow that might be. Warren Buffett said, “What counts for most people in investing is not how much they know, but rather how realistically they define what they don't know.”
In my nearly fifty years of experience in Wall Street I've found that I know less and less about what the stock market is going to do but I know more and more about what investors ought to do; and that's a pretty vital change in attitude. —Benjamin Graham
The most important lesson that investors should take from the person who taught us the difference between value and price is that value investing is not a panacea. Cheap can get cheaper. Rich can get richer. Margins of safety can be miscalculated, and value can fail to materialize.
Graham taught his students and his readers that prices fluctuate more than value, because it is humans who set price, while businesses set value.
In the four years from 1929 to the bottom in 1932, Graham lost 70%. If such a careful and thoughtful analyst can lose 70% of his money, we should be very careful to understand that while value investing is a wonderful option over the long term, it is not immune to the short‐term vicissitudes of the market.
“There are two times in a man's life when he should not speculate, when he can't afford it, and when he can.” “A banker is a fellow who lends you his umbrella when the sun is shining and wants it back the minute it begins to rain.” “That would have been foresight, whereas hindsight is my specialty.” “I was seldom able to see an opportunity until it had ceased to be one.”
“A mine is a hole in the ground with a liar standing next to it.”
Intelligence in investing is not absolute; it's relative. In other words, it doesn't just matter how smart you are, it matters how smart your competition is.
Intelligence combined with overconfidence is a dangerous recipe when it comes to the markets.
“Attribution bias refers to the tendency of people to attribute their successes to their own ability and their failures to external ‘unlucky’ forces.”
It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so. —Mark Twain
Maybe we all need to have this happen once or twice. Some things can't be taught, they have to be learned the hard way, even if we don't learn anything at all.
“Concentrate to get rich, diversify to stay rich.”
How could economics not be behavioral? If it isn't behavioral, what the hell is it? —Charlie Munger
The most disciplined investors are intimately aware of how they'll behave in different market environments, so they hold a portfolio that is suited to their personality.
You need patience, discipline, and an ability to take losses without going crazy. —Charlie Munger Kiplinger, 2005
“People calculate too much and think too little.”
If you're not willing to react with equanimity to a market price decline of 50 percent or more two or three times a century, you're not fit to be a common shareholder and you deserve the mediocre result you're going to get compared to the people who do have the temperament, who can be more philosophical about these market fluctuations.
Warren and I aren't prodigies. We can't play chess blindfolded or be concert pianists. But the results are prodigious, because we have a temperamental advantage that more than compensates for a lack of IQ points.
The Wall Street Journal reported on this link in 2005: The study suggests the participants' lack of emotional responsiveness actually gave them an advantage when they played a simple investment game. The emotionally impaired players were more willing to take gambles that had high payoffs because they lacked fear. Players with undamaged brain wiring, however, were more cautious and reactive during the game, and wound up with less money at the end.
You will do a great disservice to yourselves, to your clients, and to your businesses, if you view behavioral finance mainly as a window onto the world. In truth, it is also a mirror that you must hold up to yourselves. —Jason Zweig
