Novel Investor

Compounding investing wisdom...

Timeless Lessons from Bubbles

by Jon

Every market bubble reveals important lessons after it bursts. Some of those lessons are one-off, tied to a specific bubble. The important lessons emerge each time prices reach euphoric heights.

John Kenneth Galbraith highlighted two such lessons from the 1920s bubble during a Congressional Hearing in 1979. His first is discussed often (so I’ll keep it short). His second can be found outside bubblier times too.

A sound idea carried too far

Prices first went up because of good earnings. Then they took leave of reality. The market was taken over by people for whom the only important fact was that prices were going up. Their buying then put up the prices but with the certainty that when the supply of such speculators — and gulls — ran out, as eventually it would, the upward movement would come to an end and prices would collapse in the rush to realize and get out. This, to repeat, is the classic speculative sequence.

If the only reason for buying a stock is because the price went up…buyer beware. Continue Reading…

Timeline of the 1929 Market Crash

by Jon

On October 29th, 1979, John Kenneth Galbraith sat before a Congressional Committee to answer one question. Can it happen again?

It was the Great Depression. For all the worry about repeating the depression, the real talk centered on what preceded it — the Great Crash. And Galbraith offered his expertise on the subject.

Not perhaps since the siege of Troy has the chronology of a great event been so uncertain. As a matter of fact, economic history, even at its most violent, has a much less exciting tempo than military or even political history. Days are rarely important. All of the autumn of 1929 was a terrible time, and all of that year was one of climax. With the invaluable aid of hindsight it is possible to see that for many previous months the stage was being set for the final disaster.

Galbraith then set about clearing up the issue. The Great Crash was not a single day but a sequence of events that started months in advance. Galbraith’s prepared statement offered a clear timeline that culminated in what everyone knows as the 1929 Crash. Continue Reading…

The Uncomfortable Truth

by Jon

What’s the biggest determinant of investing success? Smarts, information, strategy, or skill are all worthy possibilities.

But one stands out above all the others:

The truly successful stock market investors of history have been no more intelligent than most less successful investors. In most instances — they have had no better sources of information than other investors. The qualities they have had in common have rather been qualities of temperament, which is why no one has ever found out how to get rich by taking courses or reading a book or reading articles (including this one). But those temperamental qualities are crucial and relate to the points I have been trying to make here: the road to success in investing is paved with independence of spirit, decisiveness, and the courage of one’s convictions. — Peter Bernstein

The market naturally triggers emotional responses that lead to mistakes. Those best equipped to handle those triggers are more likely to succeed.

That shouldn’t come as a surprise. Most things in life worth achieving require mental toughness to get through the obstacles that are certain to arise. And investing is full of obstacles. Continue Reading…

Warren Buffett: The Best Reason for Selling

by Jon

In a perfect world — assuming everything goes as planned — the best time to sell an investment is at its peak price. In reality, that’s called luck.

That’s why selling is an imperfect art. The overwhelming outcome for most sell decisions is too soon or too late.

Warren Buffett actually recognized it early on to never expect perfection:

Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results. The better sales will be the frosting on the cake.

It’s a byproduct of Ben Graham’s concept of a margin of safety. A wide margin of safety (between price and value) leaves room for error but you still make a profit. Continue Reading…

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…

Learning

Return Tables

Connect