Novel Investor

Compounding investing wisdom...

Investing Lessons from the Great Depression

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Benjamin Roth kept a diary throughout the Great Depression. His diary was turned into the book The Great Depression: A Diary which offers a unique take on the time period from a financial perspective.

Roth realized early that he was witnessing a major financial crisis and wanted to learn from it. So he started journaling in 1931. He jotted down his thoughts on stories he heard from clients and events he observed. He tracked the stock market, local stock prices, and the economy both locally and nationally.

Three big things in Roth’s diary stood out.

First, one thing Roth repeated over and over was the lack of cash to buy bargain stocks. Nobody had money. The combination of a 90% market decline and widespread bank failures destroyed people’s savings.

Even the banks that didn’t fail basically froze their customer’s savings accounts. Limits were set on how much money a customer could withdraw in a day. In some cases, it was as low as 5% of the money in their account. Continue Reading…

Lessons from the 2022 Berkshire Meeting

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The Berkshire Hathaway annual meeting was this past weekend. Warren Buffett and Charlie Munger were back to their old ways.

Though, Buffett rambled a bit more than usual. Which probably cut the number of questions in half.

But the lessons were still there. The main takeaway from this year’s meeting is about avoiding the many ways investors can lose money. Let’s dive in. Continue Reading…

This Time Wasn’t Different

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The S&P 500 is down 12% year to date with over half of those losses coming in the past month. Yet, it’s holding up better than other areas of the market.

In fact, less than half of the S&P 500 stocks are down 20% or more from their 52-week high.

% of S&P 500 Stocks Trading 20% Below 52-Week-High

That’s tame compared to the rest of the market. About 33% of all stocks are down 50% or more from their 52-week high. For the record, less than 2% of S&P 500 stocks are down that low. Continue Reading…

Robert Wilson on Adam Smith’s Money World

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Robert Wilson falls under the title of “the greatest investor you’ve never heard of.” He turned $15,000 into $230 million from 1958 to 1986.

Wilson was a long/short investor who wasn’t afraid to use leverage. He began his career as an analyst at A.G. Becker & Co. He went on to open his own hedge fund in 1968 called Robert Wilson Associates. Within a couple of years, he was strictly running his own money. He gave it up in 1986 because he promised himself that if he ever failed to beat the market for three years straight, he’d quit.

Near the end of his career, he talked with George Goodman on Adam Smith’s Money World. He discussed his investment strategy. He also highlighted how successful investments can go to your head.

In Wilson’s case, his ego got the best of him and produced his biggest loss.

It happened in 1978. Wilson bet against Resorts International. Resorts was a small casino operator with a single casino in the Bahamas, with a second casino planned in Atlantic City. The company bet its future on legalized gambling in Atlantic City. Continue Reading…

Wise Words from John Neff

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Vanguard might be known for its low-cost index funds but it carries a slew of actively managed funds too. In fact, one of the best investors ever managed Vanguard’s Windsor Fund for 31 years.

John Neff’s career at Vanguard began in 1964 until his retirement in 1995. Under his watch, Winsdor Fund outperformed the S&P 500 23 out of 31 years with a 13.7% annual return. That’s 3% better than the S&P 500 over the same period. Even better, he earned a 20% annual return on his own portfolio over the 10 years following his retirement.

More impressive is the fact that Neff believed his pay should be tied to his ability to beat Windsor’s benchmark. He convinced John Bogle to add an incentive-based fee structure to Windsor’s already low fees.

Windsor charged a 0.16% fee with an incentive-based fee that swung up or down 0.10% based on performance. If Windsor beat the S&P 500 the fee bumped up to 0.26% but if it fell short, the fee dropped to 0.06%. It wasn’t a pure beat either. Neff needed to beat the S&P 500’s trailing three average return by 1.2% to hit that incentive.

Neff had a value investing discipline. He was known as a low-P/E investor. It often led him to neglected cyclical stocks where selling was inevitable. However, his perfect stock provided dividend yield plus growth. A high total return at a low P/E multiple was his goal. Continue Reading…

Asset Allocation Drives Returns

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Sometimes it’s good to get back to the basics. The basics of investing are simple: a bias toward stocks, diversification, and a long time horizon. A portfolio tilted toward a diverse basket of stocks provides the engine for long-term growth.

Yet, investors have a knack for over-complicating investing by trying to do too much. The reason is due to three tools at our disposal. David Swensen described these tools as asset allocation, market timing, and security selection.

In theory, the tools allow us to “add value” and improve our returns. But only one does any real work. In fact, the other two are a net negative. Continue Reading…

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