The book looks at the persistence of the low-volatility anomaly throughout market history. The author explains why the anomaly exists and how to construct a portfolio of low-volatility stocks to take advantage of it.
Lawson’s Panic: A Lesson in Market Prophecies
Human nature strives to know what happens next in an uncertain world. When it comes to investing, market prophets, forecasters, and tipsters are always ready to provide it. But the results rarely pay off. No better example exists of the risk of following their advice than Lawson’s Panic.
Thomas Lawson was born in 1857. He got his start at a banking house in Boston, at age 12, after quitting school. Not long after he gained attention from speculating in stocks. He was given more important work at the bank and learned the ways to manipulate the market. He had a natural gift for it.
However, Lawson found his true calling after being charged with turning around the failing Rand, Avery publishing company. He started by publishing books that no other publisher would touch. But how would he make people aware of them?
He advertised.
Lawson saw the enormous possibilities in advertising. He demonstrated then, as he has many times since, that he could make a comfortable livelihood as an advertising expert… He organized an advertising bureau, a novelty in those days, and announced that this bureau would undertake to direct the advertising of large manufacturing concerns… This variety of advertising is very common nowadays, but it was decidely original when Lawson thought of it.
Lawson also quickly figured out how advertising could be used in his speculative efforts. Continue Reading…
There’s Always Something to Do by Christopher Risso-Gill
There’s Always Something to Do tells the story of Peter Cundill’s life and career. A chance reading of SuperMoney led him to Ben Graham’s deep value approach, which he adapted for global stock markets.
The Notes
Daniel Kahneman: Loss Tolerance
What’s your risk tolerance? How do you indentify it? Both are important questions that investors spend little time thinking about at first. They’re also abstract questions thanks to the convoluted definitions of risk.
Daniel Kahneman suggests a better way to frame the question. Rather than risk tolerance, you should ask: what’s your loss tolerance? It makes you think about protecting your money. How much loss can you endure before you reach the point where emotions push you to change your mind and change your portfolio?
That breaking point is important because it’s usually where mistakes are made like buying high and selling low. Changing your portfolio every time emotions surface leads to worse results.
By reframing the question, Kahneman forces you to think in terms of actual dollars. Lost dollars can be quickly equated to missed goals and dreams — less money for college, a canceled vacation, a postponed retirement — that make you nauseous.
So how much of your net worth do you want to keep safe versus how much are you willing to lose outright? The goal is to find that breaking point so you can build a portfolio that minimizes regret, limits how often you change your portfolio, and keeps you invested for the long run.
Kahneman went on to explain the importance of minimizing regret and how it translates to portfolio construction. Here’s what he said: Continue Reading…
Jelly Beans and the Importance of Independent Thinking
Have you ever entered a jelly bean contest, where you try to guess the number of jelly beans in a jar? An interesting thing happens when you take the average of all the guesses.
Jack Traynor did exactly that. He brought a jar of beans (not the jelly kind) into two classes and asked the students to guess the number of beans inside. So the students crowded around the jar. They tried to count the beans or estimate the beans per volume or other such things to come up with their best guess. Then they wrote down their guesses and turned them in.
Traynor found that in both classes the average of the guesses came very close to the actual number of beans. But what really stood out was that the average of the guesses beat all but one or two guesses. In other words, only one or two students actually did better than the average of the whole group.
This effect is known as the wisdom of crowds, but it requires a key ingredient: Continue Reading…
Wise Words from Robert Wilson
Robert Wilson is a lesser-known legend on Wall Street. He turned a small inheritance into $800 million, then gave away the bulk of it to charities before his death.
Wilson began his career in 1949. He spent the first two decades as an analyst, bouncing between several firms, including a hiatus while serving in the Korean War.
In 1968, he set out on his own. He set up a hedge fund, Wilson & Associates, with about $3 million in capital from friends and family. The timing could not have been worse. That same year, the market topped and by the lows of 1969, his fund was down 35%.
Withdrawals came next — reducing the fund to about $350,000. His clients bailed out at the lows. Within the next three months, his fund bounced back to break even. Then he ditched the last of his clients and truly went solo. He only managed his own money going forward.
Wilson ran a true hedge fund. His portfolio was a diversified group of both long and short positions. And he wasn’t afraid to use leverage. He looked for growth companies but used short positions to protect his capital. The ancillary benefit of short positions gave Wilson more money to bet on the long side. Continue Reading…
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