Novel Investor

Compounding investing wisdom...

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…

Wise Words from Philip Carret

by Jon

Philip Carret has one of the longest successful track records on Wall Street. But before his Wall Street career, he was a pilot in WWI, a Harvard graduate, and finally a reporter for Barron’s.

A series of articles for Barron’s led to his first book, The Art of Speculation. In it, he describes his concept of value investing.

In 1928, Carret founded the Pioneer Fund, one of the first mutual funds in the US. The fund got off to a horrible start thanks to the ’29 crash and the Great Depression. But they both survived. And despite the early losses, the fund performed phenomenally over the 55 years he ran it.

I think it’s safe to say Carret practiced the art of patient investing longer than anyone. He was still managing money when he died in 1998 at the age of 101. Thankfully he shared some of his (almost) eight decades of investing experience over the years.

Here’s Carret: Continue Reading…

Phil Fisher: Scuttlebutt and Assessing Management

by Jon

Most of the great investors are divided over the need for qualitative analysis. The two biggest areas are measuring management and moats.

Both sides make solid arguments because you’re trying to assess something that can’t be easily measured. That’s why qualitative analysis is more art than science. Put simply, some people got it, some people don’t (like me).

Those who are gifted in the art — like Buffett, Fisher, and Lynch — have an innate ability that normal humans don’t have…and their returns show it.

However, the likes of Graham and Schloss did quite well despite taking the other side of that argument. They didn’t think they could successfully do it, so they avoided talking to management like the plague.

Of course, both sides are correct…investors do better when they stick with what they’re (honestly) good at and avoid the rest.

That said, Phil Fisher mastered qualitative analysis. He wanted a company with great management at a reasonable price. He felt management was the most important ingredient to separate a business from its rivals. Continue Reading…

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