Novel Investor

Compounding investing wisdom...

Lessons from Three Ben Graham Speeches

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Benjamin Graham spent time throughout the 1940s and 50s lecturing about things he knew nothing about. The speeches came in the disguise of a “Market Outlook.” People wanted to know what would happen next. Graham’s response was typical:

The subject assigned to me for this afternoon is one about which, precisely speaking, I know nothing.

Those were the first words out of his mouth at a lecture given in November of 1952. Then he gave them a history lesson of sorts.

He repeated that in similar fashion in other speeches too. In 1942, inflation worries were the topic du jour heading into WWII. In 1950, people wanted to know how the second half of the century would turn out. In each case, Graham offered some lessons instead.

What follows are a few of those lessons from those three speeches mentioned, mostly without comment. Continue Reading…

Ben Graham’s Simple Strategy for Defensive Investors

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In January 1949, Ben Graham spoke before the New York State Bankers Association to encourage bankers to advise customers on sound investment policy. What surprised people then was his push for simplicity.

You can make investing as simple or complicated as you want. Simple strategies tend to require less knowledge, fewer decisions, and generally easier to manage. Complicated strategies tend to bring added costs (higher fees and behavioral costs) and can introduce unknown, often uncompensated, risks.

Graham’s simple strategy: divide your portfolio between government bonds and a diversified basket of common stocks or “investment — fund shares — instead of a selected common stock list.” He purposely left out corporate bonds, preferred stocks, and the like, as unneeded risks for a defensive investor.

If you’re not familiar, Graham divided investors into two categories — defensive and aggressive — defined like this: Continue Reading…

Charlie Munger’s Tendencies of Human Misjudgment

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Charlie Munger has spent a lifetime attempting to avoid stupid mistakes. He’s given a number of speeches on his experience over the years, that he ultimately compiled into one called: The Psychology of Human Misjudgment.

Munger noticed patterns of irrational behavior that led to repeated mistakes, so he set out to finds ways to understand psychology in order to avoid the mistakes himself:

I was greatly helped in my quest by two turns of mind. First, I had long looked for insight by inversion in the intense manner counseled by the great algebraist, Jacobi: “Invest, always invert.” I sought good judgment mostly by collecting instances of bad judgment, then pondering ways to avoid such outcomes. Second, I became so avid a collector of instances of bad judgment that I paid no attention to boundaries between professional territories. After all, why should I search for some tiny, unimportant, hard-to-find new stupidity in my own field when some large, important, easy-to-find stupidity was just over the fence in the other fellow’s professional territory? Besides, I could already see that real-world problems didn’t neatly lie within territorial boundaries. They jumped right across.

Through inversion, stupidity, and bad judgment, he came up 25 tendencies we’re all susceptible to whether we know it or not. What follows is a brief breakdown of those tendencies (though, I recommend reading the entire speech). Continue Reading…

Lessons from a 300 Year Old Book on Markets

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The earliest known book describing any stock exchange was written in 1688. Aptly titled, Confusion of Confusions, Joseph de la Vega describes stock and options trading (mostly of Dutch East India Company stock) on the Amsterdam stock market through a conversation between Shareholder, Merchant, and Philosopher.

The book is a defining example of how little markets have changed in over three centuries. From the early reference to the game and its primary players to the scheming and manipulation to the influential emotions of greed, fear, and panic, the lessons are old, yet still relevant today.

It starts with a fitting description of stock markets: Continue Reading…

Stan Druckenmiller’s Worst Mistake Ever

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One of the best ways to learn about investing is through second-hand experience by learning what not to do from the mistakes of others. It’s the most cost-effective, resource-abundant way to learn since history is filled with other people’s mistakes. The other option is first-hand. It’s expensive but stickier — less easily forgotten.

There’s one downside though. Knowing won’t make you immune from repeating it. All the information in the world is useless when emotions drive decisions.

Take Stan Druckenmiller.

He’s arguably one of the best investors ever. He averaged 30% per year over a 30-year career, with no losing year. And he once turned a $1 million donation to a school, invested over five years, into a $35.6 million windfall.

A return like that is not easy. It requires taking extremely concentrated bets with a lot of leverage and most importantly an openmindedness to change your mind when you’re wrong. Continue Reading…

2018: A Year in Returns

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Shelby Davis once said, “Bear markets make people a lot of money, they just don’t know it at the time.” Based on some fancy rounding, the S&P 500 hit the unwritten 20% decline rule (19.77% for sticklers) for a bear market based on 2018’s September high to the Christmas Eve low (thanks Santa).

Yet, despite that, the S&P 500 finished the year with a -4.4% total return. Global markets looked less pretty. And cash was king again.

Unless, of course, you’re a net buyer of stocks. To paraphrase Davis — bear markets are a great buying opportunity, they just don’t feel like it at the time. That feeling is the hard part for new investors and the rest of us who forgot how the last bear market felt.

Now, not all bear markets are like the last bear market. The lesson from that one was that it was excruciatingly hard for many investors to buy but also the greatest buying opportunity for anyone with time on their side. Continue Reading…

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