Novel Investor

Quote for the Week

In 1915, while just a beginner on Wall Street, I suggested that the firm recommend a low-price stock, the Computing-Tabulating-Recording Co. But my employer, a conservative fellow, pointed out that the company’s bonds weren’t covered by its assets. He said, ‘How can you touch such a speculative stock?’ And I returned to my desk a very chastised young man. Years later the public company changed its name to IBM.

He was wrong about the stock. But he was right in terms of an overall investment policy. Look at what could happen. A man could buy a stock like that at, say, $40 a share, and it goes to $100. Then people would say, ‘Don’t be a fool. Take the profit. Trees don’t grow to heaven, etc., etc.’ So he sells out, and then spends the rest of his life watching IBM go up and up, while looking vainly for another IBM. To make a fortune in one stock you almost have to be an insider. For mere traders, there are very, very few IBMs. That’s the vital point. — Benjamin Graham (source)

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Our brains have a wonderful, weird ability to make quick sense of the world through mental shortcuts. Yet, those shortcuts often fail us when it comes to money and investing.

For instance, investing is one activity where outcomes are not always obvious thanks to uncertainty. You can make the right decision and still lose money. You can also make the wrong decision and profit. So our mind fills in the blanks in a way that makes sense of it all. The result, however, can leave a false impression of the impact of skill and luck — both good and bad — on investment results.

A 1983 study by Thomas Gilovich suggests that it happens quite often. His study looked at how gamblers rationalized their success and failure from betting on football games. They were asked to record their thoughts about the outcome of bets under the guise that it would improve their betting later in the season.

Gilovich found that gamblers accounted for their wins and losses differently. It turns out, gamblers burned more mental energy to explain a loss compared to a win. Continue Reading…

Quote for the Week

It is very hard to think against the crowd, especially when the crowd is practically universal and unanimous in thought and emotion. When a man lifts his voice in chorus with a thousand other voices, singing nobly on a hillside, he will feel confident and exalted, at least until the song is ended, whether or not his actual circumstances warrant the feeling. Or try another shaky metaphor: when Galileo announced that the sun stood still and that the earth moved around it, virtually everyone with any interest in the subject agreed wholeheartedly that he was either crazy, wicked or both. This opinion was shared by both educated and uneducated. We should hesitate to label any of them as stupid, because if we had lived in those times that would almost certainly have been our scornful opinion too. — Fred Schwed Jr. (source)

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Quote for the Week

Real investment risk is measured not by the percent that a stock may decline in price in relation to the general market in a given period, but by the danger of a loss of quality and earning power through economic changes or deterioration of management. In the five editions of The Intelligent Investor I have used the example of A&P shares in 1936-1939 to illustrate the basic difference between fluctuations in price and changes in value. By contrast, in the last decade the price decline of A&P shares from 43 to 8 paralleled pretty well a corresponding loss of trade position, profitability, and intrinsic value. The idea of measuring investment risk by price fluctuations is repugnant to me, for the very reason that it confuses what the stock market says with what actually happens to the owners’ stake in the business. — Benjamin Graham (source)

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