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Howard Marks: The Human Side of Investing

September 26, 2018

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Jon

The human side of investing is easily overlooked because nobody goes in believing they’ll act like a basket case at any point in the process. Instead, the focus is finding on the right strategy or allocation or fund or stock. And it makes sense…then something wild happens because it always does.

In the latest edition of The Most Important Thing, Howard Marks points to four central themes in the book. The riskiest things were one but mastering behavior was the critical theme:

The ‘human side of investing’ is the critical side. It’s certainly an area in which superior investors must excel, since financial analysis won’t guarantee superior performance if your reactions to developments are skewed by psychology just like those of others.

In other words, the best strategy is made worse in the hands of a basket case. Successful investing involves managing yourself and your money. To that end, Marks made six comments on the importance of controlling emotion and ego. Continue Reading…
Happy Hour: Only for the Most Part

September 21, 2018

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Jon

Only for the most part is the often missing addendum to broad sweeping statements about investing. Things like “stocks outperform bonds” or “value beats growth” typically leave out the closing refrain…only for the most part.

It may not seem important but as Peter Bernstein points out: “If it were ‘always’ rather than ‘for the most part,’ there would be no uncertainty.”

As much as people crave certainty in investing they’ll never achieve always (they’ll never stop looking for it either). Despite that, market history is filled with brief periods where investors purported always was achieved.

That Bernstein quote is from a paper that began as a speech given in September 1999. For those not investing at the time, it was the beginning of the end of a wild ride.

Back then, risk got flipped on its head. The risk was missing out. Stocks — Dotcom stocks especially — achieved always…or so people thought. And anyone who disagreed was labeled an old, out of touch, idiot. Buying into stories of unlimited potential returns do that to people. Continue Reading…
Two Rules of The Money Game

September 19, 2018

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Jon

The Money Game is a book lauded by everyone and I finally made time to read it. It’s an interesting, sometimes sarcastic, take on the game of investing. And it is a game unlike any other.

Unlike most games, in this one, there are no clear-cut set of rules or a defined way to win. There are no innings or quarters or final whistle.

In fact, all the participants play the game differently and for different reasons. They make up their own set of rules and have a different definition of winning. And they often change the rules and the definition multiple times depending on how well they’re playing.

The most important thing to know about this game is to know thyself. And if you can do that, the second most important thing is that you can’t take the game personally. You have to separate yourself from the investments you own.

Without those two things, the rules and definition won’t matter because playing the game will be costly. There are other important things to know too, but those two stood out because I haven’t finished the book yet.

In this often quoted but rarely followed passage, Adam Smith (George Goodman) explains all of the above and why: Continue Reading…
Happy Hour: The Wrong Lessons of 2008

September 14, 2018

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Jon

Asset appreciation draws in people that really don’t know anything about the asset. And people start being interested in something because it’s going up, not because they understand it or anything else. The guy next door, who they know is dumber than they are, is getting rich and they aren’t. And their spouse is saying can’t you figure it out too…It is so contagious. — Warren Buffett

Warren Buffett said that in an interview published this week. He’s describing the primary driver behind the next crisis, whenever that is…and every crisis that came before it.

This week marks the 10th anniversary of Lehman’s collapse during the downward spiral of the Financial Crisis. There’s been a lot written about it this week. Some anger, understandably, still exists. The blame game is still being played a decade later. Alternative fixes are still being argued over.

Fear still lingers too.

In the same interview, Buffett said this about fear: Continue Reading…
Howard Marks: The Riskiest Things

September 12, 2018

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Jon

In the updated version of The Most Important Thing, Howard Marks, Seth Klarman, Joel Greenblatt, and others have their comments interspersed throughout the already great text.

The added comments are instructive. Marks takes a unique approach by breaking down his comments into four themes that run throughout the book — the riskiest things being one.

Most of his riskiest things revolve around behavior and ignoring imbalances in the market (there is some overlap too). The point: If you can recognize and avoid the riskiest things in investing, you’ll save yourself from a lot of pain and misery.

1. Paying for Perfection

The biggest losers — be they Nifty-Fifty stocks in 1969, internet stocks in 1999, or mortgage vehicles in 2006 — had something in common; no one could find a flaw. There are lots of ways to describe this condition: “priced for perfection,” “on the pedestal of popularity,” and “nothing can go wrong.” Nothing’s perfect, however, and everything eventually turns out to have flaws. When you pay for perfection, you don’t get what you expected, and the high price you pay exposes you to risk of loss when reality comes to light. This is truly one of the riskiest things.

Continue Reading…
Happy Hour: Klarman’s Version of Mr. Market

September 7, 2018

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Jon

I’ve said numerous times, the most important lesson in The Intelligent Investor is Ben Graham’s Parable of Mr. Market. It’s a simple story for how the market works, how some investors view price movement, and how you should really view price movement.

But it’s also one of those stories that are easy to understand but harder to actually put into practice when market prices move wildly.

That said, I think it helps to see the market through the lens of (childish) behavior – temper tantrums, throwing fits, impulsiveness, hysteria…it’s all possible and more. You can take advantage of opportunities Mr. Market offers or you can do nothing but whatever you do, don’t let Mr. Market’s mood drive your own.

So whenever I come across a good version, told by someone other than Graham, I save it or post it here, as a reminder that the stock market is an exchange for pieces of businesses, not paper. The prices reflect Mr. Market’s mood toward the paper, not necessarily the value of the business.

Seth Klarman tells a great version in his book worth sharing: Continue Reading…

Howard Marks: The Human Side of Investing

Happy Hour: Only for the Most Part

Two Rules of The Money Game

Happy Hour: The Wrong Lessons of 2008

Howard Marks: The Riskiest Things

Happy Hour: Klarman’s Version of Mr. Market