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The key is to save as much as you can, as early as you can. And if you’re willing to put money into tax-deferred savings accounts, like a 401k or your own IRA, you can build up a sizable nest egg for your retirement. Savings is the key to creating wealth. If you do a mediocre job with lots of savings, it’s better than doing a very good job with a small amount of savings. — Peter Lynch (source)
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Earnest Shackleton was a man seeking adventure. He was a member of the first expedition to reach the South Pole in 1901. The expedition failed but it was the farthest south anyone had gone before.
Shackleton would return to Antarctica two more times in 1907 and 1914. His last attempt was to be the first to cross Antarctica on foot. The expedition failed before it began. Within two months of leaving South Georgia Island for Antarctica, his ship the Endurance, sat trapped in pack ice. It marked the start of a 20-month ordeal to survive.
Shackleton is lauded for his leadership skills for good reason. The lessons stand out throughout his story. He raised his crew’s spirits, staved off doubt, and kept them focused throughout setbacks and adversity in the toughest of conditions.
But Shackleton’s harrowing story offers some lessons for investing as well. Continue Reading…
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For most of us, over a two- to three- to five-year time frame, hitting the right mark in terms of the mix of offense versus defense in a portfolio is the most important single decision. If you get the offense versus the defense right, it doesn’t matter really what you pick, what stocks you bought, or whether you did stocks versus bonds or whether you did U.S. versus foreign or whether you did small-cap versus large- or growth versus value. If you get it wrong as far as calibrating your portfolio between being defensive and more aggressive, all that other stuff isn’t going to save you. But if you get it right, you will be heading in the right direction. — Howard Marks (source)
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Sir Earnest Shackleton’s expedition to be the first to cross Antarctica in 1914 turned into a 20-month ordeal trapped in an ice pack, their ship crushed, and the desperate attempt to save themselves as the pack broke up. It’s a story of endurance and survival.
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Behavioral advantages arise out of the manifest tendencies of large numbers of people to react in predictable ways to certain kinds of situations. So we know that people are risk averse. We know that their coefficient of loss is about two to one – which means that they feel the pain of losing a dollar twice as intensely as they feel the pleasure of gaining a dollar.
People overweight the most recent information. They overreact to dramatic information, or dramatic circumstances. They tend to have what’s called outcome bias, which is they judge things on their outcome, and not on their process. So a lot of these behavioral elements are things that you can actually identify and exploit to your advantage if you are aware of them – and aware also that no matter how much you’re aware of them, you’re not immune to them yourself. You really have to have a sense of discipline and patience, and understanding in that. — Bill Miller (source)
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Predictions for the stock market surface around the turn of every calendar year. It’s an annual tradition for financial institutions. They can tout their “expertise” to clients and others who want reassurance on how the market will perform over the next 12 months.
There’s just one problem. Market predictions are almost always wrong — spectacularly so. It’s no different from the pundits that pop up every year with their failed claims of impending market doom. Sure, they may get it right eventually, but when the same prediction is made every year it’s no more expert than a broken clock.
Predicting the future is hard. Predicting the future of markets — market crashes much less the general direction of markets — is even harder.
Why is it so hard? Because markets are complex dynamic systems. Much like naturally occurring catastrophes, many complex systems tend toward a state of criticality. Wildfires, earthquakes, epidemics, avalanches, and stock markets are complex systems that self-organize toward a state of instability and sudden change.
A good example of this was found when analyzing avalanches using a sandpile game. Picture a pile of sand. One tiny grain of sand is dropped onto the pile, one at a time, to see how long it takes before the pile collapses. They tracked the frequency and size of each collapse and found the cascades to be unpredictable. Continue Reading…