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April 18 - May 25, 2020
The penultimate hurdle is myopia—an overt focus on the short term. All too often we find that consequences that occur at a later date tend to have much less bearing on our choices the further into the future they fall.
Saint Augustine ’s plea, “Lord, make me chaste, but not yet”—one
The final barrier to spotting predictable surprises is a form of inattentional blindness. Put bluntly, we simply don’t expect to see what we are not looking for.
Herb Stein’s prosaic and prophetic words of wisdom: “If something can’t go on forever, it won’t.”
Nowhere is an appreciation of history more important than in understanding bubbles.
Displacement is generally an exogenous shock that triggers the creation of profit opportunities in some sectors, while closing down profit availability in other sectors.
Just as fire can’t grow without oxygen, so a boom needs credit to feed on.
Prices are seen as only capable of always going up. Traditional valuation standards are abandoned, and new measures are introduced to justify the current price.
Sir John Templeton’s four most dangerous words in investing, “This time is different, ” reverberate around the market.
This leads to the critical stage that is often characterized by insiders cashing out, and is rapidly followed by financial distress, in which the excess leverage that has been built up during the boom becomes a major problem.
Investors are so scarred by the events in which they participated that they can no longer bring themselves to participate in the market at all.
There can be few fields of human endeavor in which history counts for so little as in the world of finance.
when asked, “Do you think we will learn anything from this turmoil?” responded, “We will learn an enormous amount in the very short term, quite a bit in the medium term, and absolutely nothing in the long term. That would be the historical precedent.”
Self-attribution bias is our habit of attributing good outcomes to our skill as investors, while blaming bad outcomes on something or somebody else.
hindsight bias. This simply refers to the idea that once we know the outcome we tend to think we knew it all the time.
the average holding period for a stock on the New York Stock Exchange (NYSE). Today the average holding period is around six months! In the 1950s and 1960s investors used to hold stocks for seven or eight years—interestingly, this was before the rise of the institutional investment as we know it today.
Not only do we desire quick results but we love to be seen as doing something (as opposed to doing nothing); we have a distinct bias towards action.
the urge to act tends to intensify after a loss—a
Blaise Pascal put it best when he said “All men’s miseries derive from not being able to sit in a quiet room alone.”
the evidence casts serious doubt on people’s ability to maintain their independence in the face of pressure.
psychologists have found that people conformed to the incorrect majority view approximately a third of the time.
The researchers found that when people went with the group answer they seemed to show a decrease in activity of the parts of the brain associated with logical thinking—the C-system. Simply put, they seemed to stop thinking.
nonconformity triggered fear in people. Going against the crowd makes people scared.
Doing something different from the crowd is the investment equivalent of seeking out social pain.
As Sir John Templeton put it, “It is impossible to produce superior performance unless you do something different from the majority,”
Groups have powerful self-reinforcing mechanisms at work. These can lead to group polarization—a tendency for members of the group to end up in a more extreme position than they started in because they have heard the views repeated frequently.
Groupthink tends to have eight symptoms: 1. An illusion of invulnerability. This creates excessive optimism that encourages taking extreme risks. This is very similar to the over-optimism and overconfidence we discussed in Chapters 4 and 5. 2. Collective rationalization. Members of the group discount warnings and do not reconsider their assumptions. They become blind in the same ways we saw in our discussion of conservatism in Chapter 10. 3. Belief in inherent morality. Members believe in the rightness of their cause and therefore ignore the ethical or moral consequences of their decisions. 4.
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The obsession with the neat elegance of mathematical models and the love of the efficient markets hypothesis that dominates economics and finance departments strike me as the result of a classic example of groupthink.
our failures to actually see our behavior as it really is (known as the introspection bias
We see others’ behavior as a demonstration of their underlying nature, while we see our own actions as driven by the circumstances we face (the fundamental attribution error).
Let me emphasize that it does not take genius to be a successful value analyst, what it needs is, first, reasonably good intelligence; second, sound principles of operation; and third, and most important, firmness of character.”
loose
In general people hate losses somewhere between two and two -and-a half times as much as they enjoy equivalent gains. This is a property known as loss aversion.
The more you check your portfolio the more likely you are to encounter a loss simply because of the volatile nature of stock prices.
This perspective is shared by Seth Klarman. He stated that if the technology existed to permit real -time performance measurement of his portfolios, he wouldn ’t want it, since it would run completely contrary to his long-term focus.
For some reason, in some bizarre mental world, people believe that a loss isn’t a loss until they realize it. This belief tends to lead to investors holding onto their losing stocks and selling their winning stocks—known as the disposition effect.
inaction inertia also known as the status quo bias.
the endowment effect says that once you own something you start to place a higher value on it than others would.
We obsess with outcomes over which we have no direct control. However, we can and do control the process by which we invest.
The need to focus on process rather than outcomes is critical in investing.
In general, holding people accountable for outcomes tends to increase the following:69 • Focus on outcomes with a higher certainty, which is known as ambiguity aversion. • Collection and use of all information (both useful and useless). • Preference for compromise options. • Selection of products with average features on all measures over a product with mixed features (i.e. average on four traits, preferred to good on two and bad on two). • Degree of loss aversion that people display.
when every decision is measured on outcomes, investors are likely to avoid uncertainty, chase noise, and herd with the consensus.
Focusing upon process frees us up from the worrying about aspects of investment which we really can ’t control—such as return. By focusing upon process we maximize our potential to generate good long-term returns.
“The value approach is inherently sound . . . devote yourself to that principle. Stick to it, and don ’t be led astray.”
many of the same biases I have discussed in previous chapters show up in our eating and shopping habits
Knowledge doesn’t necessarily lead to changes in behavior.
The reason they have codified the process is that they know that unless they force themselves to behave in this fashion, they will slip back into old habits.
