Novel Investor

Why is it that some people treat the dumbest bet possible as a stroke of genius when it hits? It’s not genius, obviously, but confusing skill and luck is a common mistake made by gamblers and investors alike. It’s one of many that arise when human nature and gambling collide.

When the House has the advantage, like in most games of chance, winning has nothing to do with brilliance. It’s almost always a bad decision saved by dumb luck. Yet, hindsight bias spares us from being honest with ourselves.

Picture the person who hits on 17 at blackjack and catches a 4. Or another who goes on an amazing run picking numbers playing roulette. It’s not some uncanny ability, infinite wisdom, nor foresight. It’s dumb luck. But the story told is about skill.

The mistake is not only denying good luck after hitting the improbable 4 on a 17 but embracing bad luck after busting on a hit on 17. The failure to account for stupidity is probably worse than being falsely endowed with unnatural gifts. Who learns from bad luck?

Of course, this problem is as old as gambling itself. A case in point is a letter to the editor of The Spectator in 1873. An insightful English gentleman shared a scathing assessment of himself, and his fellow gamblers, after his first experience in a casino. Continue Reading…

Here’s what I’ve been reading the past three months: Continue Reading…

Charlie Munger has a knack for delivering witty common-sense advice like this:

I’m a very blocking and tackling kind of thinker. I just try and avoid being stupid.

He shared some of his witticisms in an interview last month. Three of the more interesting highlights are below.

The first is Munger’s answer to the question: what traits are needed to be a great investor? Continue Reading…

2020 was a historic year, full of surprises. Nobody expected a global pandemic or how global stock markets would react to it.

Global stock markets declined in unison in the first quarter of the year following the outbreak of a pandemic. It was one of the fastest market crashes in history. Practically all markets experienced double-digit losses in the first quarter, most well in excess of -20%.

Shelby Davis once said, “Bear markets make people a lot of money, they just don’t know it at the time.” The global crash in markets gave everyone the opportunity to experience what Davis describes.

Of course, Davis’s quote only hints at the mental difficulty of the prospect. Those who buy stocks in a bear market are eventually rewarded. The difficulty lies in not knowing when or how big the reward will be. Nevermind that buying stocks amidst a crash feels about as unnatural as…social distancing. Continue Reading…

In most years, the market sits in the gray area between the two extremes of the cycle. 2020 was not one of those years. It was unique. It went from fear to greed within a matter of months.

One of the fastest crashes in market history.

The chart is the S&P 500, Russell 2000, and the Nasdaq crash in March. Everything fell. All three indexes peaked around February 19th. By March 23rd they each hit bottom.

The Nasdaq fell the least and the Russell 2000 fell the most. It was one of the swiftest crashes in market history.

Here’s what the S&P 500 looked like on a daily basis from the February peak. Continue Reading…