Novel Investor

Compounding investing wisdom...

Common Investing Mistakes of the Early 1900s and How to Fix Them

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The basic principles of sound investing have not changed in a couple of centuries. But neither has the most common errors made by investors.

A perfect example of how little investor misbehavior has changed can be found in a book by Thomas Gibson. Gibson wrote several books on investing and speculation. One of his more recent was published in 1923.

In it, Gibson recounts a study he did of the trading history of some 4,000 brokerage accounts over a 10 year period.

Two patterns really stood out. Far more people bought at high prices than low prices and almost every account that showed some type of plan for buying and selling not only gave up on the plan but would have made a profit had they stuck with it. Overall, losses were an overwhelming result.

His book, The Facts about Speculation, sums up the most common errors he found and the best ways to correct them. You’ll find a few highlights below: Continue Reading…

Lessons from Coin Flipping Gurus

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There’s a difference between a good investment and an investment that makes money. Let me explain.

You don’t have to look far to find someone who makes a small fortune in a short amount of time. It happens in every bull market. Sometimes they’re looked on with envy or jealously. And eventually, someone asks how did they do it? What’s the strategy?

It’s a perfectly normal human response because who doesn’t want to get rich too.

Except, attempts to repeat the same results…fail miserably. There are a few possible reasons why it failed. Maybe the strategy wasn’t followed to the letter. Maybe it wasn’t run long enough. Maybe behavior got in the way. Or maybe it was never the “strategy” at all.

Warren Buffett once described a fictitious contest that helps explain why often it’s simply a matter of luck. Continue Reading…

Wise Words from Philip Fisher

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Philip Fisher’s investment philosophy epitomizes patience. Not only patience with his investment portfolio but in the search for the next opportunity.

Fisher sought out companies that could grow at a high rate over a very long time. He wanted a good price too. Then he would hold them, in some cases, for decades. His portfolio was highly concentrated because those types of growth companies are rare.

That rarity meant Fisher needed more information than just the numbers:

From him I learned the value of the “scuttlebutt” approach: Go out and talk to competitors, suppliers, customers to find out how an industry or a company really operated. — Warren Buffett

His scuttlebutt method required asking the right people, the right questions to figure out how a company really worked. It’s far more qualitative than quantitative. Often, the final decision came down to the quality of a company’s management.

Fisher’s style is the perfect strategy for anyone who likes to do a lot of researching, waiting, and practically no trading. It’s also perfect for anyone who’s comfortable with the inevitable big swings in stock prices that are bound to come with it. Simply put, it’s not for everyone.

But the rest of us can still borrow a thing or two, like patience, from Fisher’s wisdom anyway. Continue Reading…

The Physicist Who Made a Fortune on Electric Utilities

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Alfred Lee Loomis wore many hats. He was an attorney, soldier, physicist, inventor, and briefly a Wall Street legend.

Upon graduating from Harvard Law School in 1912, Loomis took a job at Winthrop & Stimson practicing corporate law. He wore his attorney hat until World War I. He volunteered for the Army the moment the U.S. entered the war in 1917.

Loomis’s “inventiveness” and a written recommendation from his former boss, Henry Stimson, got him assigned to the Aberdeen Proving Grounds. He was given the role of head of the development and experimental department. Specifically, ballistics.

His first breakthrough was measuring the velocity of shells fired from a gun. His Aberdeen chronograph was a major improvement on what already existed at the time. It was reliable, portable, and could be quickly mass-produced. In other words, it was designed to be used in the war.

Loomis’s next major breakthrough wouldn’t come about until WWII. He played a key role in the development of radar, sat in on the early meetings of the Manhattan Project, invented LORAN (short for long-range navigation), and helped develop ground-controlled approach, which helped pilots land in bad weather.

But it was his time between the two wars where he made his impact on Wall Street. Continue Reading…

1929 Crash: An Industry Breakdown

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The late 1920s market bubble was one of the biggest bubbles U.S. markets ever saw. Yet, not all industries participated in it. A breakdown of how each industry performed over that period tells the tale.

The Cowles Commission started collecting market data in 1932. The data is available online (linked below), stretches from 1871 to 1937, and is broken down by industry.

A chart of the 1929 bubble and burst looks like this:

Cowles Stock Index Data 1924-1932

The data is price returns only — no dividends included.

The chart is a hot mess (done so on purpose). It’s also incomplete. For instance, the financial industry, along with investment trusts are missing from the picture. That said, it does show just how few industries were inflated at the time. Continue Reading…

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