Quote for the Week

One of the first lessons I heard about pendulums and the swing of investor behavior regarded something I was taught in the early 1970s: the three stages of a bull market. These succinctly capture the essence of investor psychology.

The first stage comes when a few people begin to realize that there will be improvement. The second stage occurs when most people realize that improvement is already taking place. The third stage comes when everyone thinks that things will be getting better forever. Clearly, the first is early; the last is laughably late. One of my favorite adages – perhaps my favorite of all – is that what the wise man does in the beginning, the fool does in the end. So it’s the buyer in the third stage – who buys when optimism is incorporated, under the assumption that things will always get better – who pays the price. — Howard Marks (source)

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The story of 2024 began with worries about market concentration in the Magnificent Seven only to have the least techy sectors stand out by year’s end.

Both the S&P 500 and Nasdaq are up close to 26% year to date. Including dividends adds a couple of percentage points to that. It’s been a phenomenal year for U.S. stocks.

International (EFA) and emerging markets (EEM) fell short of the US. Both started the year well — exceeding double-digit returns through September. Then came the dip. The disconnect in performance between US and international stocks is ongoing for over a decade. In fact, since 2009 (to 2023) the S&P 500’s total return is almost twice that of the MSCI’s international and emerging market indexes. These things tend to move in cycles, so it will be interesting to see how much longer it continues. Continue Reading…

Quote for the Week

There are myriad feedback loops at work in financial markets at any point of time. Some of them are positive, others negative. As long as they are more or less in balance they cancel out each other and market fluctuations do not have a definite direction. I compare these swings to the waves sloshing around in a swimming pool as opposed to the tides and currents that may prevail when positive feedbacks preponderate. Since positive feedbacks are self-reinforcing occasionally they may become so big that they overshadow all other happenings in the market.

Negative feedback loops tend to be more ubiquitous but positive feedback loops are more interesting because they can cause big moves both in market prices and in the underlying fundamentals. A positive feedback process that runs its full course is initially self-reinforcing in one direction, but eventually it is liable to reach a climax or reversal point, after which it becomes self-reinforcing in the opposite direction. But positive feedback processes do not necessarily run their full course; they may be aborted at any time by negative feedback. — George Soros (source)

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Quote for the Week

It is a great mistake to believe that a speculation has been unwise if you lose money at it. That sounds like an obvious conclusion, but actually it is not true at all. A speculation is unwise only if it is made on insufficient study and by poor judgment. I recall to those of you who are bridge players the emphasis that the bridge experts place on playing a hand right rather than on playing it successfully. Because, as you know, if you play it right you are going to make money and if you play it wrong you lose money — in the long run.

There is a beautiful little story, that I suppose most of you have heard, about the man who was the weaker bridge player of the husband-and-wife team. It seems he bid a grand slam, and at the end he said very triumphantly to his wife, “I saw you making faces at me all the time, but you notice I not only bid this grand slam but I made it. What can you say about that?” And his wife replied very dourly, “If you had played it right you would have lost it.”

There is a great deal of that in Wall Street, particularly in the field of speculation, when you are trying to do it by careful calculation. In some cases the thing will work out badly. But that is simply part of the game. If it was bound to work out rightly, it wouldn’t be a speculation at all, and there wouldn’t be the opportunities of profit that inhere in sound speculation. It seems to me that is axiomatic. — Ben Graham (source)

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Some of the greatest businesses are defined by the chances they take to prevent the business from becoming stagnant. We see the successes but it’s the little failures along the way that drive their success.

That willingness to fail plays an important role in a business’s survival. In fact, the opposite often seals a company’s demise.

Creative destruction is a natural process that wipes out companies all the time. Complacency does too. Some of the greatest companies of the last century disappeared because management found unique ways to rest on their laurels.

The company finds early success doing something different, grows to an immense size, and becomes an industry leader. After a few decades, management becomes arrogant, complacent, and comfortable. Bureaucracy creeps in. Before they know it, some new upstart, more willing to take risks, has passed them by.

Sears, Xerox, and Kodak are three examples from a long list of once-great companies where management quit taking risks. They avoided the uncomfortableness of failure and ceased to stay relevant. Continue Reading…