Novel Investor

Compounding investing wisdom...

Deep Dive into a Correction

by Jon

Out of all the 2020 market predictions, nobody suspected a virus. The future can be unpredictable like that.

But that’s why a plan is so important. Your investment plan may not have foreseen what would hit the markets, but it should have prepared you for a hit of some kind.

As we’re finding out, Mr. Market can get wild at times. While the S&P 500 is down 10.8% from its 2020 high, it’s only down 6.4% on the year. That brings it back to the same level it was at four months ago — November 2019.

If it feels worse, it’s because the fall happened so quickly. Seven trading days, and a 12.8% decline, separate the February 19th high from the February 28th low.

And it’s been highly volatile since. So far, March saw the S&P move: 4.6%, -2.8%, 4.2%, -3.4% over its first four consecutive trading days.

Of course, that only tells part of Mr. Market’s story. What about the stocks inside the S&P 500? Just because the S&P is down doesn’t mean every stock in the index is down (it’s a convenient example of the benefits of diversification in times like these). Which happens to be the case YTD: Continue Reading…

England’s First Market Bubble: The Mania of 1692

by Jon

The year was 1688. The mood in England was optimistic. People were flush with cash and had few places to put it. The environment was ripe for a mania.

The East India Company was one of a handful of joint-stock companies trading at the time. Trading is a loose use of the term. Few people were willing to part with their East India shares since they were so lucrative and the company refused to issue more. The demand for shares needed to be supplied…

About 100 new joint-stock companies schemes would be born over the next four years — insurance, fisheries, tanning, swords, diving, and more. Stories would be woven about the future prosperity of each endeavor.

And like all bubbles, investors ate it up. What started as a need to earn a decent return, morphed into a get-rich-quick greed as the price action and large gains took hold. It would fuel the mania until something — supply for shares exceeded demand — caused the collapse.

If this sounds familiar, it should. It was repeated again in 1720. Twenty-eight years later the South Sea Bubble would birth (and wipe out) a similar list of companies. And that’s just the next market bubble, in a long list of bubbles that mirror it.

The bubble that began in 1688 was mostly forgotten until Lord Macaulay retold the tale almost 200 years after it popped (added paragraph spacing for easier reading): Continue Reading…

Inverting the Investment Process

by Jon

Charlie Munger held court at the DJCO annual meeting a few weeks ago. One issue with Munger’s (and Buffett’s) popularity is the Q&A session at these meetings get repetitive. Anyone watching past sessions or reading through old transcripts will hear the same questions and answers annually.

Now, every so often, Munger changes up the answers.

This year, he expanded on a trick he calls the inversion process. It’s the idea of flipping a problem (or question) on its head. It has wide uses, including in investing: Continue Reading…

Lessons from the 2019 Berkshire Letter

by Jon

Warren Buffett began his 2019 Shareholder Letter with a review of a short but groundbreaking book. The findings would change what the author, and everyone along with him, believed ever since.

Edgar Lawrence Smith set out to prove a theory that bonds were better investments than stocks during periods of deflation, while stocks were better than bonds during inflation.

Instead, he found that stocks were better investments all around. His work, Common Stocks as Long Term Investments would be published in 1924. The ideas didn’t catch on until John Maynard Keynes popularized the book with a written review in May of 1925.

Smith’s findings completely upended the widespread view that bonds were “safe” and stocks were speculative. And the book would go on to play a role in the ensuing market bubble that burst in 1929. Continue Reading…

Jelly Beans and the Importance of Independent Thinking

by Jon

Have you ever entered a jelly bean contest, where you try to guess the number of jelly beans to win the jar? An interesting thing happens when you take the average of all the guesses.

Jack Traynor did exactly that. He brought a jar of beans (not the jelly kind) into two classes and asked the students to guess the number of beans inside. So the students attempted to count the beans, or estimate the beans per volume, or other such things to get their best estimate. Then they wrote down their guesses and turned it in.

Traynor found that in both classes the average of the guesses came very close to the actual number of beans. But what really stood out was that the average of the guesses beat all but one or two guesses. In other words, only one or two students actually did better than the average of the whole group.

This effect is known as the wisdom of crowds, but it requires a key ingredient: Continue Reading…

The Man Who Made a Killing on the 1929 Crash

by Jon

Floyd Odlum was an opportunist. He took advantage of a bad situation to become one of the richest people in America shortly after the crash of 1929.

Odlum saw an opportunity amid the rubble of investment trusts. Investment trusts were like the first iteration of today’s closed-end mutual funds.

They were first introduced in the U.S. around 1926, in the form of trading corporations, with the sole purpose of investing pooled capital into stocks. And like many new investment vehicles, it didn’t take long for them to become wildly popular with investors.

By 1929, roughly 640 trusts existed with about $4 billion in assets. In ’29 alone, trusts accounted for one-third of the $6 billion in new offerings — about $1 billion of that was estimated just in August and September alone. Continue Reading…

Learning

Return Tables

Connect