Novel Investor

Quote for the Week

The really hard part about investment policy is not figuring out the best feasible combination. While it takes some time and analytical discipline, this part of the problem-solving is far from advanced science.

The really hard part is managing ourselves: our expectations and our interim behavior. Walt Kelly’s Pogo puts it as “we have met the enemy and he is us.” Most investors are too optimistic about the long run and much too optimistic about how well they will do compared to the averages, so they set themselves up for disappointment.

Even worse, most investors do harm to their longer-term investment results by trying and trying again to do better: changing managers and changing asset mix at the wrong time and in the wrong way. — Charles Ellis (source)

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Quote for the Week

My ability to forecast the market is no better than anybody else’s, which means it’s quite poor. Some people are successful in calling one or two or even three turns in a row, but they are even worse off than I am because once somebody thinks he can forecast the market he tends to put increasing amounts of money behind his opinions. When he finally makes a mistake, he really gets destroyed…

As I said, I don’t know what the market is going to do. I don’t think most people are any good at forecasting swings either, so I think this leaves you with only two ways of approaching the market. In the first, you remain fully invested at all times, and every once in a while you stand up and take your losses like a gentleman. The other involves following a formula of one sort or another. — Robert Wilson (source)

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Quote for the Week

Some years ago I was the adviser to a profit-sharing trust for a large commodities dealer, I bought for them — I think the stock has been split 15 times since then — a block of Texas Instruments at $14 a share. When the stock got up to $28, the pressure got so strong (“Well, why don’t we sell half of it, so as to get our bait back?”) I had all I could do to hold them until it got to $35. Then the same argument: “Phil, sell some of it; we can buy it back when it gets down again.”

That is a totally ridiculous argument. Either this is a better investment than another one or a worse one. Getting your bait back is just a question of psychological comfort. It doesn’t have anything to do with whether it is the right move or not.

But, at any rate, we did that. The stock subsequently went above $250 within two or three years. Then it had a wide open break and fell to the mid-50s. But it didn’t go down to $35. — Philip Fisher (source)

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Value investing strategies come in many styles. However, the two styles that stand out the most act like bookends to the value philosophy.

Ben Graham pioneered the search for statistically cheap stocks. He originally looked for stocks selling far below liquidation value. That strategy worked throughout the depths of the Great Depression and well into the 1940s and ’50s. It fell out of favor during the Go-Go ’60s, back into favor with the 1973-74 crash, and bounced in and out (mostly out) of favor ever since.

Some of Graham’s more ardent followers used his strategy outside the U.S. with much success. Others adapted as the market caught on and the classic Graham bargains disappeared. They looked for hidden assets, low price-to-book, etc. They redefined what a statistical bargain looked like.

Overall, Graham’s strategy was built around estimating asset values, which change significantly less than stock prices. An investor, willing to dig through balance sheets, estimate assets conservatively, and with a little bit of patience, could earn a good return without much risk if they bought a stock cheap enough.

At the other end of the spectrum was Phil Fisher. Fisher learned that he got better returns out of the stocks of growing companies that he bought and held for several years compared to those that he bought at a low price, sold at a high price, and repeated. Continue Reading…