Novel Investor

Compounding investing wisdom...

Wise Words on Forecasting

by Jon

In a matter of two months, a miraculous number of people became experts in virology in order to predict something they know nothing about.

That’s the state of the market today. It also happens to be the state of the market every day — minus the new armchair virologists.

Investors want to know what happens next. We take comfort in thinking we know — especially in extremely uncertain times like these.

The problem lies in predicting a multitude of factors, their effects on businesses, on markets, on people’s behavior, and any randomness that might occur in the process, all while staying unbiased.

In short, we’re not great at predicting the future. In fact, we’re exceptionally bad at predicting the major turning points that have a huge impact on markets.

Yet, investing is about the future so we can’t exactly get away from it. As investors, our decisions always involve some level of uncertainty. Continue Reading…

Peter Bernstein: The Lesson of History

by Jon

In investing, nothing is written in stone. Yet, investors often operate as if the opposite is true…to their own detriment.

One mistake investors make is to focus too much on the averages of history while ignoring the deviation from the averages that always seem to happen in the short term. The clearest example of this is the stock market itself, via the S&P 500. It’s never, not once, earned its average annual return in a single year. Check for yourself.

Then there are the investing rules of thumb we all rely on because they work…most of the time. The mistake, of course, is to never question them.

Peter Bernstein reiterates this point in summing up market history. Investing is guided by the past but the future is not limited to what has already happened. A level of uncertainty, however small, always exists that can surprise us: Continue Reading…

Dazed and Confused About the Market

by Jon

April’s unemployment numbers jumped to 14.7%. The market was up 13% in April!

Earlier this week, Disney cut its dividend after reporting a 93% drop in earnings. The next day, it’s stock was up 4%!

How can the market move higher with so much bad economic news around? It defies common sense. Or does it?

If you’re confused about what’s going on in the stock market, I thought I’d add to it with some help from Peter Bernstein: Continue Reading…

Notes from the 2020 Berkshire Meeting

by Jon

The Berkshire Hathaway annual meeting this past weekend had a few notable differences this year. Missing from the meeting were Charlie Munger’s witty quips, a packed stadium, and the often-repeated meaning-of-life questions.

Instead, it took on a more serious tone. For Buffett, the focus is on the survival of Berkshire. The single message: risk management. The lesson is making sure money is available when you need it most.

These are the notes: Continue Reading…

Speculative Market Myopia

by Jon

The stock market, in the early 1980s, experienced a speculative bubble in hard disk drive manufacturers. All the ingredients existed for the new industry to succeed and for investors to lose money.

The computer industry has a long history with new technology that increased performance coupled with gradually declining costs. Hard drive technology was no different.

From the start, hard drives were complex and expensive, so they were mostly used on mainframe computers. But that changed in the early ’80s. Technology improvements throughout the late 1970s lowered costs and better computer performance drove a need for more storage. Hard drives were in demand.

Industry analysts, in 1979, projected OEM sales at $700 million by 1983, up from $27 million in 1978. The next year, they raised the ’83 forecast to $1.1 billion. Actual sales didn’t disappoint.

The projections set the industry into overdrive. And the industry had all the necessary ingredients for success: high growth projections, rising valuations, easy access to capital, new technology innovation, cost reductions, and new uses for drives. Continue Reading…

Buffett: Why Smart People Do Dumb Things

by Jon

Warren Buffett appeared on Adam Smith’s Money Game in 1998. It was the follow-up show to Adam Smith’s Money World that ended a year or two earlier. Smith (aka George Goodman) interviewed Buffett around the time of the 1998 annual meeting.

One of the questions Smith asked was related to I.Q. – combining brilliance and investing won’t guarantee success. Smith wanted to know why. Buffett felt an important third ingredient was needed. Here’s what he had to say:

Adam Smith: Why do smart people do dumb things?

Warren Buffett: That’s the big question. Why do they do it in investing? Why do they do it in managing businesses? Because you have all these smart people out there. The money doesn’t go to the people with the highest I.Q. There would be a very poor correlation between I.Q. and investing and results. And you say to yourself why does somebody with a 500-horsepower motor only get 100-horsepower out of it? And I would say that if you look at the intellect as being the horsepower that’s available, but you look at the output as reflecting the efficiency of that motor, it is rationality that causes the capacity to be translated in output.

Now, what interferes with rationality? It’s ego. It’s greed. It’s envy. It’s fear. It’s mindless imitation of other people. I mean, there are a variety of factors that cause that horsepower of the mind to get diminished dramatically before the output turns out. And I would say if Charlie and I have any advantage it’s not because we’re so smart, it is because we’re rational and we very seldom let extraneous factors interfere with our thoughts. We don’t let other people’s opinion interfere with it. We don’t get– we try to get fearful when others are greedy. We try to get greedy when others are fearful. We try to avoid any kind of imitation of other people’s behavior. And those are the factors that cause smart people to get bad results. Continue Reading…

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