AAII is on a roll with great interviews this month. I highlighted one with Philip Tetlock a few weeks ago and somehow overlooked another with Bill Bernstein.
The conversation works around the idea of being wrong but setting yourself up for minimal losses when it happens. Of course, this is the basis of value investing. Margin of safety, capital preservation, avoiding big losses, why Buffett asks “What could go wrong?”, and even diversification is built around this concept. It’s something many investors overlook because they’re so keyed into the story, the promises, and the possibilities of everything going right.
I pulled out a few good quotes and linked to it below, but it’s worthy of a full read.
You invest in such a way that if you are wrong the consequences are relatively minimal; you avoid the really bad result of being wrong in some other direction. You make a decision and you ask yourself, “How can I be wrong?” and you pick the path that leads to the least damaging outcome if you are.
A hundred and fifty years ago, Walter Bagehot was the editor of the The Economist and wrote a very, very prescient sentence. He said that John Bull can stand many things but he can’t stand 2%. What he was talking about were the falling interest rates that were seen during the middle and latter part of the 19th century when you could get 4% on Consols (consolidated British annuities), which was a real yield; there was no inflation back then to speak of because they were on a gold standard. Yields went down to 2% and people couldn’t live on 2%, so they began investing in speculative assets and invariably got their fingers burned.
The very best returns are made when you are rewarded for the risks. That comes straight out of finance theory. But if you know financial history, you know that the best times to buy stocks were June of 1932, September/October of 1974, June of 1982 and March of 1989. Those four times the world looked like it was going to heck in a hand basket. Those are always the best times to buy.
- When the Worst of Times is the Best of Times – Vanguard
- Timing “Smart Beta” Strategies? Of Course! Buy Low, Sell High – Research Affiliates
- The False Premise of the Shareholder Value Debate – HBR
- Penny Stock Chronicles (7 part series) – The Intercept
- How to invest like Buffett’s hero Philip Carret – Telegraph
- Practice Doesn’t Make Perfect – M. Konnikova
- The Difference Between Rationality and Intelligence – NY Times
- Berkshire Hathaway Symposium (video) – Youtube