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One of Warren Buffett many cryptic quotes that stand out is:
Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.
I’m sure a lot of people take this literally and do their best to never lose money ever. That, of course, is the wrong way to approach it.
So it helps to not take Buffett so literally, in this case.
Buffett’s message is a simple, though confusing, one that Seth Klarman does a great job deciphering in Margin of Safety: Continue Reading…
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I spent some time this week catching up on a backlog of videos I’ve wanted to watch. Two stood out.
The first is a Q&A with Howard Marks. The second is a conversation with Ben Hunt. The two conversations fit well together.
Wharton: Investor Series featuring Howard Marks
The hour-long Q&A session with Marks kicks off with how margin safety fits into distressed debt investing. Of course, it’s no different than any intelligent strategy. As Marks explains it, “If you can make those judgments on the basis of conservative assumptions and still end up with good room for profit, then that’s a source for margin of error.”
The purpose of Ben Graham’s margin of safety is to give yourself room to make mistakes and not lose much (or still come out ahead). Most people should understand that. Continue Reading…
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There is something fascinating about science. One gets such wholesale returns of conjecture out of such a trifling investment of fact. — Mark Twain
Many a statistic is false on its face. It gets by only because the magic of numbers brings about a suspension of common sense. — Darrell Huff
Data is easily manipulated. That is to say, it can be made deceptive, misleading, or be a big fat lie. It happens everywhere someone wants to make a point fit their narrative or agenda. Politics and advertising are some of the biggest manipulators around.
The world of finance is no slouch either. It happens with earnings…well, adjusted earnings. When you absolutely, positively have to show a good quarter, just conveniently leave out a few expenses.
In How to Lie with Statistics, Darrell Huff takes a witty approach to all the ways people can deceptively turn raw data into biased “facts” and how to spot it: Continue Reading…
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The only constant in markets is change. Take the 1950s.
The first detailed study the stock market was done in 1952 on shareholder demographics in the U.S. The book is 140 pages of tables and charts breaking down businesses and share ownership in the U.S. (someone shared a link to it earlier this week, don’t remember who).
The most obvious thing that stands out is the huge difference in the sector/ industry breakdown in 1952 compared to today. Continue Reading…
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In 1867, while standing in front of the Manchester Statistical Society, John Stuart Mill delivered the future template for market bubbles.
…that during each of those decades commercial Credit runs through the mutations of a life, having its infancy, growth to maturity, diseased over-growth, and death by collapse; and that each cycle is composed of well-marked normal stages, corresponding to these ideas in nature and succession. And as Credit is a thing of moral essence, the external character of each stage of its development is traced to a parallel change of mental mood…the malady of commercial crisis is not, in essence, a matter of the purse but of the mind.
Mill looked at previous panics thinking that some general pattern would emerge. He was right. He saw a dramatic shift in mindset throughout the cycle: from panic came revulsion, to caution, moderation, then euphoria, and back to panic. Mill hoped that being able to recognize the mood swings could help avoid future disaster.
Mill broke the cycle down into three stages, attaching a mindset to each. Continue Reading…
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It’s been 10 years since the financial crisis. Sometimes it feels like a lifetime ago. There were some rocky moments since, but overall things turned much better than almost everyone predicted. That said, nothing’s ever perfect or permanent.
The advantage of history is the ability to revisit past experiences and keep the lessons fresh in our minds. Being a decade removed, now seems like as good a time as any to do that.
In his 2010 annual letter, Seth Klarman wrote about the 20 lessons he took away from the ’08 crisis. The best part is the lessons don’t require another crisis to be useful.
Below, you’ll find an edited excerpt from his letter: Continue Reading…