Quote for the Week

As I see it, the fundamental problem in common stocks is the market’s injection of a large speculative element into the strongest and best companies by establishing an untenably high price for them. This has added greatly to the confusion between investment and speculation, because it is easy to tell oneself that the shares of a good company are always a sound investment, regardless of price. From this it was an easy step to calling everyone an investor who bought his shares outright, and finally to calling every Wall Street customer an investor — period.

My recent crusade has been to persuade Wall Street that it has made a mistake, and harmed itself, in suppressing the word “speculation” from its vocabulary. Speculation is not bad in itself; over speculation is. It is important that the public should have a fairly good idea of the extent to which it is speculating, not only when it buys a “hot issue” at a completely silly price, but even when it buys into a wonderful concern such as IBM at 70 times its highest recorded earnings. To my mind the most valuable contribution that security analysts could make to the art of investing would be the determination of the investment and speculative components in the current price of any given common stock, so that the intending buyer might have some notion of the risks he is taking as well as what profit he might make. — Ben Graham, 1963 (source)

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Quote for the Week

The hedge fund known as “Long Term Capital Management” collapsed, through overconfidence in its highly leveraged methods, despite IQs of its principals that must have averaged 160. Smart, hard-working people aren’t exempted from professional disasters from overconfidence. Often, they just go around in the more difficult voyages they choose, relying on their self-appraisals that they have superior talents and methods.

It is, of course, irritating that extra care in thinking is not all good but also introduces extra error. But most good things have undesired “side effects,” and thinking is no exception. The best defense is that of the best physicists, who systematically criticize themselves to an extreme degree, using a mindset described by Nobel Laureate Richard Feynman as follows: “The first principle is that you must not fool yourself and you’re the easiest person to fool.” — Charlie Munger (source)

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Quote for the Week

Understanding that we do not know the future is such a simple statement, but it’s so important. Investors do better where risk management is a conscious part of the process. Maximizing return is a strategy that makes sense only in very specific circumstances. In general, survival is the only road to riches. Let me say that again: Survival is the only road to riches. You should try to maximize return only if losses would not threaten your survival and if you have a compelling future need for the extra gains you might earn.

The riskiest moment is when you’re right. That’s when you’re in the most trouble, because you tend to overstay the good decisions. So, in many ways, it’s better not to be so right. That’s what diversification is for. It’s an explicit recognition of ignorance. And I view diversification not only as a survival strategy but as an aggressive strategy, because the next windfall might come from a surprising place. I want to make sure I’m exposed to it. Somebody once said that if you’re comfortable with everything you own, you’re not diversified. — Peter Bernstein (source)

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History is a funny thing. Despite being over and done with, it’s changing. It’s fluid. Our understanding of history is in a state of flux.

Our knowledge of any past event is always incomplete, probably inaccurate, beclouded by ambivalent evidence and biased historians, and perhaps distorted by our own patriotic or religious partisanship. “Most history is guessing, and the rest is prejudice.”

To top it off, we may not have enough information — yet or ever — to piece it all together. New ideas and discoveries can rewrite what we thought we knew about the past.

So historians make do with what they have. The result is an incomplete, biased, and often simplistic story that brings order to past events.

That’s roughly how The Lessons of History, a book by Will and Ariel Durant, presents it. And it relates surprisingly well to investing. For instance, the above describes how media present headlines and narratives around market moves. Continue Reading…