Quote for the Week

As human beings, particularly if we are successful in other parts of our lives, we are notoriously unable to accept the obvious reality that, on average, we are average, and that our normal experiences will usually be about average because we are, as a group, captives of the normal distribution of the bell curve. It amuses us that Lake Wobegon’s children are all above average, yet studies all the time show we think we are above-average drivers, above-average parents — and above-average investors. And we do tend to take it personally when our stocks go way up or go way down, even though, as Adam Smith admonishes, “The stock doesn’t know you own it.” — Charley Ellis (source)

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Quote for the Week

As an investor, you have to deal with two risks: The risk of losing money, and the risk of missing out on opportunities. It’s the job of a good investor to balance the two: you invest, but with caution… I think it’s better to turn cautious too soon rather than too late… It’s precisely when people can’t see what it is that could make things turn down that risk is the highest. It could be an economic slowdown, rising interest rates, the effect of central bank tightening, or geopolitical events. Or it could be something else. It’s always the things we don’t know about that really bite us in the end. — Howard Marks (source)

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Part of investing is discerning between what will change and what will stay the same when digging for opportunities. History hints at the answers.

Study a little history and you’ll recognize obvious changes over the past century due to innovation, new business creation, and more that created massive opportunities for investors that recognized it and held on.

However, one thing stands out that has changed the least — human nature. The behavior of other investors creates massive opportunities, but it requires learning a different lesson then everyone else.

Because it never fails that investors learn the wrong lessons in bull markets. The reason behind it is simple.

A new batch of investors join the queue each year. Add to that the existing portion of investors yet to experience a full market cycle. Toss in a few more who have the experience of only mild market swings compared to history and you get some interesting lessons learned.

Our pattern seeking ability falls short of scientific when it comes to making money in markets. The downside is we see patterns in random or noisy data leading to faulty assumptions and ill-conceived decisions.

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Quote for the Week

One of the most remarkable things about the investing world is how (correctly) venerated Warren Buffett is and how completely people ignore his investing advice. Since Mr. Buffett has made more money than anyone in the history of the planet solely through investing, one would think that when he says quite clearly what to invest in, people would pay attention. I guess they do pay attention, they just do the opposite. In 1974, near the bottom of the market, he said stocks were so cheap he felt like an over-sexed guy in a harem. In 1999, near the top, he opined that stocks would see returns way below those experienced in the bull market up to that time. From the time of his comments in November 1999 to the end of October 2008, stocks fell over 2% per year. In October 2008, again near the bottom, Buffett published an op-ed in the New York Times entitled, “Buy American. I Am.” telling people to buy American stocks. They promptly accelerated their selling. On October 5th of this year, he said the following: “It is quite clear stocks are cheaper than bonds. I can’t imagine anybody having bonds in their portfolio when they can own equities.” The result: people pour their money into bond funds in record amounts, and sell their holdings in funds that invest in U.S. stocks. Why investors persist in doing the opposite of what the greatest investor of all time does, is a greater mystery than the problem of consciousness, or the origin of life, or free will and determinism. Those at least are hard problems. — Bill Miller (source)

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