Quote for the Week

I don’t remember the exact year, maybe 2005 or 2006, David Swenson and I were having lunch. I said, “David, this is going to surprise you but I’m concerned that you may be too careful, too defensive, too protective. I just wonder; should you be a little bit more assertive and take a little more risk?” He said, “Honestly, I don’t know. But I do know one thing. Just about the time you think there’s never going to be a horrific negative surprise, one comes barreling along. I may be too careful. I may be too protective. I may be too defensive. Though knowing history, I think it’s probably a pretty good idea.”

So when the horrible experience came slamming through, it wasn’t that he was really prepared for that specific one, but he was well prepared for real difficulties…

There’s a lot to be careful about. Many see “be careful” as not doing things that are bold or courageous or creative. That’s not the right way to be careful. You should be bold, creative, and courageous, but disciplined and know exactly what you’re doing. — Charles Ellis (source)

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Uncertainty is built into every complex system. It’s open-ended. It’s unpredictable.

We face uncertainty when the data we base decisions on only looks backward. This is the crux of investing and why so many great investors have shared thoughts on handling uncertainty.

All the historical market data in the world tells us little about what lies ahead. That’s not to say historical data is useless. It’s…incomplete. We can learn how past events played out, how people reacted to those events, and use that to inform our decisions.

The downside is that history makes things appear predictable. Hindsight makes it easy to explain past events in a tidy way that eliminates the uncertainty and randomness that prevailed at every moment. What happened was bound to happen. The outcome was all but certain. That thought process leads to overconfidence in our ability to predict future outcomes.

Of course, businesses emerged over a century ago within finance to fill the need for certainty. They turned hindsight into a convincing story about the future. Today, forecasters, modelers, and charlatans abound with predictions for markets, the economy, and everything else. When they’re right, they’re praised. When they’re wrong — they usually are — people ignore that they are wrong and listen anyway. Continue Reading…

Quote for the Week

It was the publication of E.L. Smith’s little book entitled, “Common Stocks as Long-Term Investments.” His study showed that, contrary to prevalent beliefs, equities as a whole had proved much better purchases than bonds during the preceding half-century. It is generally held that these findings provided the theoretical and psychological justification for the ensuing bull market of the 1920’s. The Dow Jones Industrial Average (DJIA), which stood at 90 in mid-1924, advanced to 381 by September 1929, from which high estate it collapsed — as I remember only too well — to an ignominious low of 41 in 1932.

On that date the market’s level was the lowest it had registered for more than 30 years. For both General Electric and for the Dow, the high point of 1929 was not to be regained for 25 years.

Here was a striking example of the calamity that can ensue when reasoning that is entirely sound when applied to past conditions is blindly followed long after the relevant conditions have changed. What was true of the attractiveness of equity investments when the Dow stood at 90 was doubtful when the level had advanced to 200 and was completely untrue at 300 or higher. — Ben Graham (source)

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Quote for the Week

If you believe — as I have always believed — that the value approach is inherently sound, workable, and profitable then devote yourself to that principle. Stick to it, and don’t be led astray by Wall Street’s fashions, its illusions, and its constant chase after the fast dollar. Let me emphasize that it does not take a genuis or even a superior talent to be successful as a value analyst. What it needs is, first, reasonable good intelligence; second, sound principles of operation; third, and most important, firmness of character. — Ben Graham (source)

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