Quote for the Week

The fact that Black Swans can and do happen in our financial system holds important lessons for how we think about risk. While we look for corroboration of what we believe (confirmation bias), what we really ought to be looking for is the opposite—that observation that would prove us wrong. Sad to relate, we know what is wrong with a lot more confidence than what we know is right. Yet we continue to look ahead with apparent confidence that the past is prologue, based on our assumptions that the probabilities established by history will endure.

The idea of seeking out evidence that contradicts our belief goes far beyond the financial markets. It goes to the very nature of knowledge itself. For the eminent British philosopher Sir Karl Popper—well-known for his use of the Black Swan metaphor—the key question was “what if science didn’t proceed from observation to theory? What if it was the other way around?” Writing in The New Yorker, journalist Adam Gopnik described Popper’s reasoning: “No number of white swans could tell you that all swans were white, but a single black swan could tell you that they weren’t… Science, Popper proposed, didn’t proceed through observations confirmed by verification; it proceeded through wild, overarching conjectures which generalized ‘beyond the data,’ but were always controlled and sharpened by falsification (i.e., proof that the theory was wrong).”

“It was the conscious, purposeful search for falsification by refutation, by the single decisive experiment” (or swan), Popper believed, “that allowed science to proceed and objective knowledge to grow.” Yet most of us—in our investment ideas and political ideas alike—do quite the reverse: we search for facts that confirm our beliefs (reinforcement bias), not for the facts that would negate them. — John Bogle (source)

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Andrew Carnegie was among the first to go big in the industrial age. He was a titan. He built the steel industry and, in turn, became the richest man in the world.

His autobiography details his journey from Scotland to America, from bobbin boy to captain of industry. While Carnegie paints a rosy picture at times, some lessons on business, investing, and life stand out.

It pays to be early.

Carnegie wasn’t the first to build an iron mill. He wasn’t the second or third or fourth. But he did know the railroad industry. He knew it was in its infancy based on personal experience.

When he joined the Pennsylvania Railroad, no rails had crossed the Mississippi River yet (the first bridge over the river was built at Rock Island in 1856). He recognized that industries that needed iron products had a massive growth runway.

One of Carnegie’s earliest endeavors was a rail-making company. The North had a supply problem during the Civil War. There were more than enough raw materials to supply the war effort. What they were short on was iron rails. Continue Reading…

Quote for the Week

Nothing tells in the long run like good judgment, and no sound judgment can remain with the man whose mind is disturbed by the mercurial changes of the Stock Exchange. It places him under an influence akin to intoxication. What is not, he sees, and what he sees, is not. He cannot judge of relative values or get the true perspective of things. The molehill seems to him a mountain and the mountain a molehill, and he jumps at conclusions which he should arrive at by reason. His mind is upon the stock quotations and not upon the points that require calm thought. Speculation is a parasite feeding upon values, creating none. — Andrew Carnegie (source)

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Quote for the Week

The enchantment which some growth companies convey to the stock market lends a premium to their common stocks which is not always justified by the statistical background. An investor may do well with such stocks, but there is good reason to believe that he can do even better by giving the financial results…a completely cold-blooded and objective analysis. No amount of study in this area can minimize the importance of trying to buy at a fair price; buying at any price and hoping that the future will take care of itself is a good short cut to disappointing results.

Indeed, perhaps the most important conclusion of this analysis is that the term “growth stock” is meaningless; a growth stock can be identified only with hindsight — it is simply a stock which went way up. But the concept of “growth company” can be used to identify the most creative, most imaginative management groups; and if, in addition, their stocks are valued at a reasonable ratio…the odds are favorable for appreciation in the future.  — Peter Bernstein (source)

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