Novel Investor

Compounding investing wisdom...

Peter Bernstein: Embracing Mistakes

by Jon

Stan Druckenmiller once said, “Every great money manager I’ve ever met, all they want to talk about is their mistakes. There’s a great humility there.”

So what’s the benefit of constantly talking about their mistakes? For one, they embrace the inevitable.

Investing is just a long series of decisions where some end in gains and others end in losses. If you’re doing it right, the gains outweigh the losses in the end, hopefully, by a large enough margin that your goals are reasonably satisfied.

In other words, every investor makes mistakes. Those that don’t are lying. That’s the uncomfortable truth. Those that go on to be great investors, learn this through experience…and apparently love to talk about it.

Howard Marks, in his latest book, shared a great excerpt by Peter Bernstein which drives home the importance of this realization and why it matters: Continue Reading…

Wise Words from Gerald Loeb

by Jon

Gerald Loeb’s classic might as well be called The Battle for Investment Survival and other writings. The original was published in 1935.

Since then, it’s been revised so many times that it’s doubled in size. In the copy I read, the other writings made up half the book.

The writings are a collection of articles and lectures by Loeb that repeats his main points on investing and strays into a number of other topics — taxes, retirement, job advice, travel, architecture, and a recipe for ice cream soda. So because of that, I purposely left most of it out of the notes.

That said, Loeb is highly quotable, so here are a few lines that stood out: Continue Reading…

A Few Lessons from The Battle for Investment Survival

by Jon

Investing is more art than science because psychology affects prices. That’s what makes investing difficult.

Yet, the difficulty is what most investors underestimate at first. Gerald Loeb points out the difficulties of investing throughout his book, The Battle for Investment Survival, before finally summarizing it:

The most important things any reader of these chapters can learn are likewise that investment and speculation are difficult, not easy; uncertain, not clearcut; treacherous, not logical. Here, more than anywhere in the world, is the land of illusion. Things are not what they seem. Two and two don’t always make four. “Stocks were made to sell.” Caveat emptor —”Let the buyer beware.”

And that’s the first of many lessons from the book. Here’s another. Losing is part of the battle: Continue Reading…

Wise Words from Peter Lynch

by Jon

Anyone who got the investing itch in the ’80s or ’90s followed Peter Lynch at some point. He was the last star mutual fund manager — who left the game early and for the right reasons. Lynch was playing at another level than everyone else.

One of the best examples of this, that I’ve come across, was in the 1988 Baron’s Roundtable discussion. All these fund managers are in the same room. They’re a little jittery after the ’87 crash. They’re arguing about what’s next for the economy, interest rates, trade deficits, and “what if there’s a recession or another crash?” Basically, all the crap you hear on CNBC every day.

And then there’s Lynch — I picture him sitting quietly, smirking. Finally, he interrupts:

There’s always something to worry about. But it’s garbage to worry about these things… You have to look at corporate profits, and see what’s going on in the companies. It’s total garbage to worry about the things that’s going to drive us to a 300 Dow. It’ll be something you couldn’t imagine if you picked the brightest or dumbest people in the world and assembled them for hours.

Lynch made his point and none of it stuck because everyone went to back arguing about the economy. It’s his sarcastic, witty, cut through the noise style that really stands out and makes for some classic lines.

Here’s Lynch: Continue Reading…

Philip Carret on Forecasting Market Swings

by Jon

There’s a long history of market timing methods that work some of the time. Yet, the search for the holy grail strategy to get in and out of the market before every turn has been a failed endeavor. That hasn’t stopped people from searching or trying the latest and greatest method that worked twice in a row.

I’ve been reading a series of articles written by Philip Carret in 1926-27. Buffett was a big fan of his (so I did some digging). Carret would base a book on the series — The Art of Speculation — titled with the same name.

Despite the title, Carret was a value investor. He would go on to found one of the first mutual funds in 1928, ran it for the next 55 years while beating the market in the process. He also had a solid understanding of market history, market cycles, and the tendencies of its participants.

In one article, he points out why market timing methods fail eventually and how difficult forecasting can be. Continue Reading…

Galbraith: ’29 Financial Innovation Run Amok

by Jon

John Kenneth Galbraith kicked off 1987 with a warning of excessive speculation in the stock market. Black Monday came nine months later. A 22% loss for the Dow. The worst single-day drop in market history.

Was it prescience or luck? Who cares. Galbraith, as usual, offered a history lesson worth learning.

He specifically covers four parallels between 1929 and 1987.

  1. Speculation, euphoria, and greed take hold
  2. Financial innovation run amok, fueled by debt
  3. Inevitable punishment of those previously viewed as financial “geniuses”
  4. Policy changes meant to “stimulate the economy” just flowed into the market

The second is worth highlighting because of the long history of financial innovation run amok.

By the late ’20s, companies were creating companies out of thin air, issuing bonds and a minority of the stock to the public. The newly created companies had no other purpose but to own stock.

But it didn’t end there. The new company would create a company, issue a minority of stock to the public, and the process would repeat all the way down. Investment trusts would do the same. The entire process drove the market. And easy access to leverage magnified it.

The “innovation” was seen as ingenious at the time, yet looking back it all seems ridiculous. As Galbraith concludes — we prematurely ascribe genius to anyone associated with large amounts of money. It’s a repeated trend that gets investors into trouble. Continue Reading…

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