Novel Investor

Compounding investing wisdom...

What I Learned from the Most Popular Posts of 2018

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With a couple weeks left to the year, it’s time for a review.

Like last year, I spent most of 2018 sharing what I found in books, articles, interviews, etc. And like every year, I still have no clue why some posts get traction over others.

Big names certainly help, as you’ll likely notice below. But beyond that, the sort of randomness to it remains a mystery to me. Regardless of why, when it does happen, it’s always a nice surprise and I appreciate it!

The broad lesson from this year, much like every year, is this: The studying of strategies, factors, and allocations is pointless if you don’t have the prerequisite behavior to go with it. Compounding misbehavior, mistakes, and poor decisions are the easiest way to go broke. Doing the opposite (more often than not), finding a strategy you can stick with, one that fits your quirks (along with a regular saving schedule), is how to grow wealth.

The secret is there are no secrets. The lessons in the posts below span over 130 years. None of it is new or groundbreaking. It’s all grounded in common sense. Someone just said it differently enough to strike a chord.

Here are the most read posts of 2018: Continue Reading…

Marty Whitman: The Art of Good Enough Investing

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The idea of good enough flies in the face of the belief we have absolute control over our investment results. We don’t have control but want to believe we do because the alternative — being out of our hands — can be unsettling.

That feeling leads people to obsess over the minutiae in the market and economy, in order to predict the future, so they can perfectly time the market turns, and maximize returns.

In reality, investing is messy. Perfection is a lofty goal doomed to failure because mistakes and being wrong are part of the process. So is dumb luck. And bad luck.

Good enough investing accepts the messiness up front. Smart investing strategies are built around it, by accepting the role probability plays and, given time, swings success in their favor. The best outcome isn’t necessarily the best return, but a favorable return.

Marty Whitman explained his version of good enough investing in a 1996 shareholder letter. He boiled it down to knowing the limits of his skill and being less active. Once his “safe and cheap” criteria were met, it came down to good enough. Continue Reading…

Seth Klarman: Opportunities from the Herd

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Studying investor behavior is a two-part process. The first, limiting the influence of biases and misbehavior improves your returns. The second step is to seize opportunities created by those who refuse to learn the same lessons you did.

The opportunities created by the short-term nature of the herd are why most strategies work. The heart of value investing revolves around this idea. Value exists because investors mistakenly discount current prices for an indefinitely bleak future.

But first, that means not getting swept up in the herd behavior you’re attempting to profit from. Optimism and pessimism, greed and fear, risk tolerance and risk-aversion are easier to latch onto when others do the same. Safety in numbers feels comforting until you find out, a little too late, that the numbers were acting irrationally.

Seth Klarman likes to point to the importance of discipline and patience in investing. Conveniently, discipline and patience are literally a contrarian stance as far as herd behavior is concerned. The independence it creates — to have a process you stick to no matter what — becomes the backbone to successful investing. Continue Reading…

Howard Marks: The Messy Cause and Effect of Cycles

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Howard Marks makes a point in his book, Mastering the Market Cycle, that cycles are messy. The repetition of cycles is not like a metronome — up and down, up and down — sounding off regular intervals. The repetition is only in a very general sense.

It’s not that B follows A and C follows B, but A leads to B because a multitude of factors influenced the how, why, when, and where of the next leg of the sequence causing B to happen. Then a multitude of factors causes C, and so on.

The point Marks is making is that cycles aren’t clean and uniform in the real world, but more of a jumbled messy interaction between human behavior, markets, businesses, economies…and so forth: Continue Reading…

Lessons on Risk From Peter Bernstein

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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…

Peter Lynch on Market History

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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…

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