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Lessons on Risk From Peter Bernstein

November 7, 2018

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Jon

Being wrong, missing out, volatility, permanent loss…risk gets defined too many ways. It’s true, and yet, risk is a little more complex than a simple definition when uncertainty is involved.

After reading through a few dozen pieces from Peter Bernstein, I’m fairly sure he had risk figured out as best as anyone can figure it out. Though he doesn’t offer a simple definition for risk – the first highlight below is a great soundbite to add to the list — he does deliver a better way to think about it in a broader sense.

What follows are some of Bernstein’s thoughts on risk that stood out most in what I read. Continue Reading…
Happy Hour: The Spooky Month?

November 2, 2018

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Jon

October. This is one of the peculiarly dangerous months to speculate in stocks in. The others are July, January, September, April, November, May, March, June, December, August, and February. — Mark Twain

Octobers seem to be a spooky month and I’m not talking about Holloween. That’s because a few big market crashes give October a bad name — October 1929, 1987, and 2008. Those three Octobers were the three worst Octobers respectively.

So 2018’s October ends up being the 9th worst October for the S&P 500 at -6.9% for the month.

Yet historically, Octobers have been fairly tame, except for the outliers. The average S&P 500 return for the month of October is only 0.5%.

And when you compare October to all the other months, it looks less spooky. Continue Reading…
Peter Lynch on Market History

October 31, 2018

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Jon

Reposting this as a reminder that markets move.

Stock prices wobble. Stock markets wobble too. Sometimes it’s more like a tremor. In any case, it’s a daily thing and investors need to be reminded of this.

I’ve been reading some old Peter Lynch interviews and articles he wrote from the late ’90s and early 2000s. Peter Lynch is known for his often misinterpreted “invest in what you know” philosophy. To him, part of owning stocks meant knowing what you own (meaning work and research).

He also meant knowing market history and Lynch knows it well. He’s better at rattling off historic market stats than most. Continue Reading…
Happy Hour: The Speculative Factor

October 26, 2018

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Jon

In most periods the investor must recognize the existence of a speculative factor in his common stock holdings. It is his task to keep this component within minor limits, and to be prepared financially and psychologically for adverse results that may be of short or long duration. — Benjamin Graham

Ben Graham had it right. Within every stock price is a speculative factor.

It’s why a company like Align Technology can have a market cap of $31 billion one month and $23 billion a month later. It’s why AMD can drop from $36 billion to $26 billion in a month. And it’s why Nektar Therapeutics can go from $11 billion to $7 billion in the same period. That’s a change of -39%, -38%, and -37% respectively in market cap over one month!

Why those three stocks? Maybe you’ve never heard of them, but if you own an S&P 500 fund, you own all three stocks. And those three stocks are the worst performers in the S&P 500 since it hit a high on September 20, 2018 (and they’re not isolated either). Continue Reading…
Peter Bernstein: Embracing Surprise

October 24, 2018

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Jon

When something you expect to happen, doesn’t happen, you get surprises. In markets, the result is an adjustment in prices. Some people might call it volatility.

Of course, volatility carries a negative connotation (confusing it with risk hasn’t helped its image either). I’ve heard nobody is comfortable around asset prices that jump around a lot. It’s apparently so bad, that people purposely build strategies to minimize it in their portfolio. Their goal: avoid surprises.

A smart contrarian might see it differently: volatility — surprises — are a feature of markets. Expectations are often wrong, unexpected things happen, prices adjust sometimes dramatically, which creates opportunities for those less fearful of volatility. In other words, embracing surprise leads to opportunity.

Suppressing volatility is no different than attempting to remove surprise from markets. It’s not only impossible but it — probably, eventually — leads to more of the thing you’re trying to avoid. How does it go — “Stability leads to instability.” Continue Reading…
Happy Hour: The Lesson from Ice Cream and the Crash of ’29

October 19, 2018

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Jon

While writing out my notes on Why You Win or Lose, two stories stuck out that are worth sharing. The first one is a simple analogy using ice cream to show how investors drive market prices to irrational levels, then see it all come crashing down:

My friend, Willard Kiplinger, well-known savant of Washington, gave me an extemporaneous explanation of how fictitious stock values, forced up by greed, must collapse.

He and I and another friend were having dinner together when Kiplinger remarked: “I suppose the stock market is like this: Here I have a dish of ice cream that cost me ten cents. Robert, the waiter, comes in and says the ice cream is all gone and no more is to be had tonight. My ice cream suddenly seems more valuable to you and you offer me, say, twelve cents for it. Then Bill, who had intended to order ice cream, makes you an offer of thirteen cents. You, being Scotch, can’t resist taking a profit. Bill brags so much about the ice cream that I decide I was foolish to let it go in the first place and buy it back for fourteen cents. About that time I discover, to my dismay, that the ice cream has melted.”

The second story is about the irrational crowd behavior leading up to and following the Great Crash of 1929 (emphasis mine): Continue Reading…

Lessons on Risk From Peter Bernstein

Happy Hour: The Spooky Month?

Peter Lynch on Market History

Happy Hour: The Speculative Factor

Peter Bernstein: Embracing Surprise

Happy Hour: The Lesson from Ice Cream and the Crash of ’29