Novel Investor

Compounding investing wisdom...

“Cheap” Versus “Dear”

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It’s going to be a brief one since I’m traveling. No posts next week for the same reason.

While digging for stuff on Walter Schloss a few weeks ago, I found a short research piece he and Ben Graham helped on. The piece was published in January of 1951. It studied the performance of the “cheap” versus “dear” stocks in the Dow from 1914 to 1948.

It turns out the “dear” stocks outperformed “cheap” and the Dow in the first half of the period (1914 – 1931) in the run-up to the 1929 peak. But the “cheap” stocks extreme outperformance in the second half (1932 – 1948), drove it to outperform “dear” over the entire period.

The strategy implied is not something to use today but the explanation might sound familiar: Continue Reading…

Lessons from Three Ben Graham Speeches

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Benjamin Graham spent time throughout the 1940s and 50s lecturing about things he knew nothing about. The speeches came in the disguise of a “Market Outlook.” People wanted to know what would happen next. Graham’s response was typical:

The subject assigned to me for this afternoon is one about which, precisely speaking, I know nothing.

Those were the first words out of his mouth at a lecture given in November of 1952. Then he gave them a history lesson of sorts.

He repeated that in similar fashion in other speeches too. In 1942, inflation worries were the topic du jour heading into WWII. In 1950, people wanted to know how the second half of the century would turn out. In each case, Graham offered some lessons instead.

What follows are a few of those lessons from those three speeches mentioned, mostly without comment. Continue Reading…

Excerpts from the Latest Marks and Klarman Letters

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Howard Marks released his latest memo this week and Seth Klarman’s letter was leaked last week.

Marks’ Memo, titled “Political Reality Meets Economic Reality” covers just that. He spends the time on the second and third order consequences on two worrying trends in politics: tariffs and anti-capitalist sentiment.

Politicians perfected the offer of easy solutions to complex problems because they want soundbites that quickly get you to “yes.” Diving into second and third level consequences ruins their soundbite and puts votes at risk.

The memo is worth reading for Marks’s balanced take. I’ll add that the Appendix on “The Tax System Explained in Beer” is not to be missed. Continue Reading…

Ben Graham’s Simple Strategy for Defensive Investors

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In January 1949, Ben Graham spoke before the New York State Bankers Association to encourage bankers to advise customers on sound investment policy. What surprised people then was his push for simplicity.

You can make investing as simple or complicated as you want. Simple strategies tend to require less knowledge, fewer decisions, and generally easier to manage. Complicated strategies tend to bring added costs (higher fees and behavioral costs) and can introduce unknown, often uncompensated, risks.

Graham’s simple strategy: divide your portfolio between government bonds and a diversified basket of common stocks or “investment — fund shares — instead of a selected common stock list.” He purposely left out corporate bonds, preferred stocks, and the like, as unneeded risks for a defensive investor.

If you’re not familiar, Graham divided investors into two categories — defensive and aggressive — defined like this: Continue Reading…

Some Book Notes

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Several years ago, I read Mortimer Adler’s How to Read a Book after seeing it discussed on Farnam Street. A book about reading a book sounds like a joke, I know, but it’s surprisingly not.

From an early age we’re taught to read, but not how to learn and fully understand something from reading. The book is an instruction manual on that process.

I won’t rehash it all here (read the book if you’re interested), but I was already doing part of that process like marginalia — highlighting, underlying, circling keywords, notes in the margins, etc.

I highlighted and underlined the hell out of that book but never bothered to summarize or go back through it to take notes. But I quickly recovered on the next book — marginalia, summary, notes, the works — and maintained some consistency after that. Continue Reading…

Charlie Munger’s Tendencies of Human Misjudgment

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Charlie Munger has spent a lifetime attempting to avoid stupid mistakes. He’s given a number of speeches on his experience over the years, that he ultimately compiled into one called: The Psychology of Human Misjudgment.

Munger noticed patterns of irrational behavior that led to repeated mistakes, so he set out to finds ways to understand psychology in order to avoid the mistakes himself:

I was greatly helped in my quest by two turns of mind. First, I had long looked for insight by inversion in the intense manner counseled by the great algebraist, Jacobi: “Invest, always invert.” I sought good judgment mostly by collecting instances of bad judgment, then pondering ways to avoid such outcomes. Second, I became so avid a collector of instances of bad judgment that I paid no attention to boundaries between professional territories. After all, why should I search for some tiny, unimportant, hard-to-find new stupidity in my own field when some large, important, easy-to-find stupidity was just over the fence in the other fellow’s professional territory? Besides, I could already see that real-world problems didn’t neatly lie within territorial boundaries. They jumped right across.

Through inversion, stupidity, and bad judgment, he came up 25 tendencies we’re all susceptible to whether we know it or not. What follows is a brief breakdown of those tendencies (though, I recommend reading the entire speech). Continue Reading…

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