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…

Can you manage yourself in a bubble, and can you manage yourself on the other side? It’s very easy to say yes when you haven’t been there. But it’s very hot in that oven. And can you save your ego, as well as your wealth? I think I might have just said something important. Your wealth is like your children — the primary link between your present and the future. You should try to think about it in the same way. You want your children to have freedom but you also want them to be good people who can take care of themselves. You don’t want to blow it, because you don’t get a second chance. When you invest, it’s not your wealth today, but it’s your future that you’re really managing. — Peter Bernstein (source)

Quote for the Week

It is my memory that virtually every bull market has had its equivalent of an America Online and a Yahoo. Some of my nominees for historical Internet equivalents will probably shock those of you under 50 years of age. Believe it or not, the Yahoo and AOL of the mid-1950s were Superior Oil and Amerada Petroleum. The Magellan Fund of the day was a fund called One William Street managed by Lehman Brothers. Its phenomenal record in the 1950s rested largely on the fact that it had over 15% of its portfolio in Amerada Petroleum. The same phenomenon was seen again a decade later with Dreyfus Fund and its oversized commitment to Polaroid. The list goes on. In the 1960-61 bull market the darlings of the moment were in financial services. The stocks that you absolutely had to own were Kansas City Life, U.S. Life, Hugh W. Long and Hamilton Management. It’s hard to believe that mutual fund management stocks were really hot stocks 40 years ago…

1968 brought us the wildest IPO market I’ve ever seen until just lately. The darlings of the moment, of course, were the fast food companies. The stocks you absolutely had to own were Kentucky Fried Chicken and Denny’s. If you want to check out something close to a high water mark in foolishness, go back and look at Minnie Pearl’s Fried Chicken. The company went public on the basis of having sold thousands of franchises. It achieved a market value of about $400 million before quietly going out of business having actually having built only two or three chicken stands. On we go to the two tier market of 1972 where there were lots of stock you absolutely had to own, but the list included such notables as Avon and Polaroid that 27 years later are nowhere near their highs of 1972.

My point in all this is that the market is screwy most of the time. Today it is particularly screwy. — Robert Kirby 1999 (source)

Not long after telegraph and telephone lines were strung across the U.S, the wireless telegraph was invented by Guglielmo Marconi. His two-way radio broadcast transmitted telegraph signals long distances without any wires.

Marconi recognized the disruptive potential of his new invention and sought out investors in England to fund his new venture. The Marconi Wireless Telegraph Company was formed in 1897.

A similar story played out across the pond in Chicago. Lee De Forest, fresh out of Yale, took a job as a laboratory assistant. De Forest joined Edwin Smythe and Clarence Freeman to help build their own wireless apparatus. In 1901, they successfully sent a communication to a yacht five miles off the coast of Lake Michigan.

The three quickly realized the business potential. All they needed was capital. So De Forest traveled to New York to find investors and form a company. He found Henry Snyder, a promoter, who scrounged up $3,000 from five investors and incorporated the Wireless Telegraph Company of America in New Jersey.

But it was Abraham White who changed the fate of their company forever. White was a self-made speculator who once made $100,000 on a 44-cent gamble. White immediately saw the potential of wireless technology to enrich himself and cooked up a scheme to make it possible:

Quote for the Week

Volatility is noise. The short-term trader bets on the noise; the long-term investor listens to the signal. But the long-term investor who thinks that the main trend will even out volatility over time is in for a shock. Volatility is the central concern of all investors, but it matters more in the long run than in the short run.

Volatility matters, because it defines the uncertainty of the price at which assets will be liquidated. The Ibbotson Associates data tells us that the expected total return of the S&P 500 for a one-year holding period is about 12.5 percent, but you should not be surprised if you come out somewhere between -8 percent and +32 percent, a spread of 400 basis points. The range for individual stocks is much wider. So volatility appears to matter a lot if you are going to hold for only a year.

Stretch your holding period out from one year to ten years, and the range of the expected return narrows to between about +5 percent to +15 percent a year, a spread of only 100 basis points and implying very little chance of loss over the ten-year period. Although volatility now seems much less troublesome than it did in the one-year horizon, and although the odds on the losing money when you liquidate are now greatly reduced, do not be lulled by that relatively narrow range of annual rates of return. What matters is not the annual rate of return but the final liquidating value at the end of ten years.  A dollar invested for ten years at 5 percent compounds to $1.63; at 15, it compounds to $4.05. As a dollar invested for one year is likely to end up at the end of the year between $0.92 and $1.28, the spread in liquidating value over one year is far narrower than the probable outcomes over a ten-year holding period, despite the greater standard deviation of returns. So where is the uncertainty greater — in the short run or the long run? — Peter Bernstein (source)