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Marty Whitman: The Art of Good Enough Investing

December 5, 2018

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Jon

The idea of good enough flies in the face of the belief we have absolute control over our investment results. We don’t have control but want to believe we do because the alternative — being out of our hands — can be unsettling.

That feeling leads people to obsess over the minutiae in the market and economy, in order to predict the future, so they can perfectly time the market turns, and maximize returns.

In reality, investing is messy. Perfection is a lofty goal doomed to failure because mistakes and being wrong are part of the process. So is dumb luck. And bad luck.

Good enough investing accepts the messiness up front. Smart investing strategies are built around it, by accepting the role probability plays and, given time, swings success in their favor. The best outcome isn’t necessarily the best return, but a favorable return.

Marty Whitman explained his version of good enough investing in a 1996 shareholder letter. He boiled it down to knowing the limits of his skill and being less active. Once his “safe and cheap” criteria were met, it came down to good enough. Continue Reading…
The Short-Term Trap

November 30, 2018

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Jon

A Seth Klarman speech, titled Hard Decisions, about the constant pressure toward a short-term view and the expansive pitfalls it creates. It’s worth reading.

Consider corporate time horizons. It’s a choice to attempt to maximize corporate results over the very short run and a different and sometimes harder decision to take a longer-term view. I’m convinced that one of society’s most vexing problems is the relentlessly short-term orientation that manifests itself in investing, in business decision-making, and in our politics. Educational and philanthropic endowments, for example, with institutional time horizons that necessarily span centuries, invest their funds with monthly performance comparisons. Jeremy Grantham, cofounder of the global investment firm GMO, recently observed in the context of governmental inaction on climate change, “We face a form of capitalism that has hardened its focus to short-term profit maximization with little or no apparent interest in social good.”
Continue Reading…
Seth Klarman: Opportunities from the Herd

November 28, 2018

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Jon

Studying investor behavior is a two-part process. The first, limiting the influence of biases and misbehavior improves your returns. The second step is to seize opportunities created by those who refuse to learn the same lessons you did.

The opportunities created by the short-term nature of the herd are why most strategies work. The heart of value investing revolves around this idea. Value exists because investors mistakenly discount current prices for an indefinitely bleak future.

But first, that means not getting swept up in the herd behavior you’re attempting to profit from. Optimism and pessimism, greed and fear, risk tolerance and risk-aversion are easier to latch onto when others do the same. Safety in numbers feels comforting until you find out, a little too late, that the numbers were acting irrationally.

Seth Klarman likes to point to the importance of discipline and patience in investing. Conveniently, discipline and patience are literally a contrarian stance as far as herd behavior is concerned. The independence it creates — to have a process you stick to no matter what — becomes the backbone to successful investing. Continue Reading…
Marty Whitman on Why Value Exists in Bull Markets

November 16, 2018

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Jon

I was browsing some of Marty Whitman’s old Third Avenue shareholder letters I had dug up a few years back. The nice thing about these old letters is the ability to go back to see someone’s thought process around bigger market events.

An excerpt (below) from one of those letters stood out for two reasons. First, Whitman wrote it in July 2000, a few months after the peak of the Dotcom Bubble, though nobody knew it was the peak at the time. The opening paragraph shows the juxtaposition of Dotcom enthusiasm versus the ignored value stocks Whitman was buying.

Those ignored stocks were trading at 10x earnings, while the market was going nuts over Nasdaq stocks at 141 times earnings. Even the P/Es of the Nasdaq versus the S&P 500 was hugely distorted.

The idea of paying $141 for $1 of earnings seems insane today, but that was typical back then. I remember friends asking about getting into eToys.com after the IPO. It practically tripled the first day, closing with a market cap 35% higher than Toys R Us despite only having $34 million in revenue and zero profits (Toys R Us had $11 billion in revenue at the time). Continue Reading…
Howard Marks: The Messy Cause and Effect of Cycles

November 14, 2018

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Jon

Howard Marks makes a point in his book, Mastering the Market Cycle, that cycles are messy. The repetition of cycles is not like a metronome — up and down, up and down — sounding off regular intervals. The repetition is only in a very general sense.

It’s not that B follows A and C follows B, but A leads to B because a multitude of factors influenced the how, why, when, and where of the next leg of the sequence causing B to happen. Then a multitude of factors causes C, and so on.

The point Marks is making is that cycles aren’t clean and uniform in the real world, but more of a jumbled messy interaction between human behavior, markets, businesses, economies…and so forth: Continue Reading…
Joel Greenblatt’s Version of Mr. Market

November 9, 2018

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Jon

Ben Graham’s Parable of Mr. Market is a simple story that gets to the heart of how the stock market works and how investors should work the stock market. Proof of its importance lies in just how often it gets retold. The thing about each retelling is that while the story is roughly the same, each storyteller adds their own spin, often focusing on a unique thing.

Joel Greenblatt’s version focuses on the one thing that is easily overlooked — the choice to do nothing. In every market situation, you have three options: buy, sell, or do nothing. A massive amount of digital ink is spilled on the first two. The market news and commentary revolve around it.

Yet, the last choice — the most important one — gets little attention. The ability to do nothing, to sit on your hands, and not react every time Mr. Market rattles off a crazy number for a piece of paper fits with the fortitude, patience, and discipline needed to succeed. Continue Reading…

Marty Whitman: The Art of Good Enough Investing

The Short-Term Trap

Seth Klarman: Opportunities from the Herd

Marty Whitman on Why Value Exists in Bull Markets

Howard Marks: The Messy Cause and Effect of Cycles

Joel Greenblatt’s Version of Mr. Market