Novel Investor

As 2021 draws to a close, let’s review some of the lessons from the most popular posts this year.

After twelve years of doing this exercise at the end of each year, one thing stands out. I still have no idea what posts will rise to the top and which will flop. The list is entirely a product of your support. So thanks for reading and sharing!

The collection of posts below covers a range of topics. Most of them are based on something I’ve read this year. Two exceptions, however, are a response to the market craziness this year.

Right at the top, the market experienced a short squeeze that got everyone’s attention. Of course, it wasn’t the first time it happened (nor the last). So it became an opportunity for a history lesson. The other offers one perspective on how much optimism is priced into the market. The point is market history is filled with things that rhyme with the present. It offers investors a broader perspective on how things might turn out and relieve any angst and worry too.

As for the rest, it’s an assortment of people and topics. Buffett and Munger make an appearance. Peter Lynch and Bernard Baruch do too. Lou Simpson and Robert Kirby, two under-the-radar names, also show up. Investor behavior and common mistakes were also frequent and relevant themes this year.

There should be something for everybody. Let’s dive right in. Continue Reading…

In the summer of 1999, Warren Buffett stood in front of a group of business leaders to share his views on the “new economy.” He believed that the exceptional rate of return on the stock market at the time was unsustainable. His audience wasn’t impressed.

A year later the Dotcom Bubble burst and Buffett was proved right. His “outdated views” had substance. After all, he had history on his side. Anytime innovation created a booming new industry it was followed by a collapse.

I thought it would be instructive to go back and look at a couple of industries that transformed this country much earlier in this century: automobiles and aviation. Take automobiles first: I have here a page, out of 70 in total, of car and truck manufacturers that have operated in this country…

All told, there appear to have been at least 2,000 car makes, in an industry that had an incredible impact on people’s lives. If you had foreseen in the early days of cars how this industry would develop, you would have said, “Here is the road to riches.” So what did we progress to by the 1990s? After corporate carnage that never let up, we came down to three U.S. car companies — themselves no lollapaloozas for investors. So here is an industry that had an enormous impact on America — and also an enormous impact, though not the anticipated one, on investors.

Sometimes, incidentally, it’s much easier in these transforming events to figure out the losers. You could have grasped the importance of the auto when it came along but still found it hard to pick companies that would make money.

Buffett’s tale of the airplane industry was similar. The number of airplane companies ballooned to roughly 300 by 1939 before declining to a handful today. Picking the winners from the outset was practically impossible. Continue Reading…

When it comes to investing, it’s often what you don’t do that matters most. The best example of this is misbehavior.

Unfortunately, not nearly enough investors see it that way. And why should we? We’re bogged down with messages about owning the right investments for today’s environment. Which leads to market timing and forecasts. Two things were terrible at, by the way.

Besides, when patience and fortitude are cited as reasons behind investing success, it comes off as too easy…at first. A few decades of experience might challenge that perception.

Investing is a long-term game, that requires long-term patience at the risk of being constantly distracted from that effort. We’re tempted by headlines and market moves to act on a daily basis.

And sometimes it works because we like stories. Headlines offer simple explanations — that link cause with effect — for why the market did what it did that day.

It doesn’t matter that the story is wrong. Markets are too complex to pinpoint the sole reason behind a day’s action. But that doesn’t matter. Our simple brains prefer the stories because the stories present an illusion of control over the outcome and often times a scapegoat for why we lost money. Which is better than the alternative apparently. We much prefer to believe that we control the outcome rather than being at the whim of chance. Continue Reading…

Thomas Gibson had a front-row seat to the speculative madness in Wall Street at the start of the 1900s. He saw traders succeed and (mostly) fail on a regular basis for a decade. In those few successes and many failures, some common themes stood out.

For instance, ignorance, overtrading, and negligence were the main reasons people lost money.

The business method, as he called it, was absent. More often than not, speculators treated the market as a casino rather a place to buy and sell shares of businesses for cash. They knew little about the companies behind the shares they bought — relying on tips over research.

Worst of all, they seemed to do everything backward. The height of speculation was always at market peaks when prices and enthusiasm were highest. But when opportunities were prevalent at lower prices, that interest and enthusiasm had dried up. It seemed as though they wanted quick riches, with little to no effort, or not at all. Slowly wouldn’t do.

Gibson wrapped up those experiences in his first book published in 1906. The Pitfalls of Speculation is a perfect example of how long sound investing principles have been around and how rarely investors heed them. You’ll find some highlights from the book below: Continue Reading…