Novel Investor

Markets have a way of luring investors into doing things they shouldn’t. Be it innovative new products or promises of high returns, there’s always something to tempt an investor’s resolve. And it ends up being costly. As with many things in life, avoiding certain things often lead to the greatest results.

I was reminded of this while browsing Another Investor’s Anthology. Part of its collection is a chapter from an outdated book by Claude Rosenberg, Jr. It’s a list of investing rules that are more likely to cost you money than make it in the long run. So investing don’ts. His list pertains to stocks specifically but is true for most investments.

Here’s the thing. None of the rules are new. They’ve been repeated so many times that they should sound obvious. Which is the point.

Common investing mistakes are common because it’s so easy to fall back into the trap of making them. Sometimes we forget how it turned out the last time. Sometimes it’s a momentary lapse of judgment. Whatever the reason, hindsight reveals what we likely already knew — we never should have done it in the first place.

But that’s life. Mistakes will be made. The goal is to limit the damage. Timely reminders of the more obvious ones may save us from ourselves someday. Continue Reading…

Ben Graham once alluded to the idea that the market cycle might as well be called the human-nature cycle… Because the rise and fall of speculative behavior follow the same path.

Graham, of course, meant it as a warning.

He saw speculation as an attempt to profit purely off of moves in market prices. Nothing else matters. Not valuation, earnings, cash flows, or what management is doing to improve the business. Just price.

In other words, if you’re buying a stock with the hope of flipping it to someone else at a higher price, then you’re speculating.

The keyword being hope. When you buy a stock for no reason other than the price is going up, you’re gonna need it. You might as well be gambling. Continue Reading…

Certain pockets of the market tend to outperform others. The classic value metrics like price-to-earnings or price-to-book were the first to be discovered back in Ben Graham’s era. Since then numerous value metrics have shown better results (we’ll get to those at later date).

Value metrics work in the long run mainly because of mean reversion and a side of behavioral bias. Investors tend to place bets based on popularity and recency bias. As Graham said, “In the short run, the market is a voting machine…”

The thinking goes like this. Companies doing well will continue to do well and companies doing poorly will continue to do poorly and nothing will change that. This works for a while until mean reversion steps in. Mean reversion is the tendency for fundamentals and stock prices to revert to a long-run average thanks to competition.

Excellent companies, with high-profit margins and growth rates, that make a ton of money, get priced with that mind but they also attract competition. That competition puts pressure on profit margins, growth rates, etc. which feeds into P/E ratios, stock prices, and more. In other words, the excellent company becomes an average company and markets eventually adjust its stock price to that reality. Continue Reading…