Thomas Gibson’s 1909 classic breaks down the market cycles of the 1800s, the speculative behavior behind them, and the typical errors speculators make each step of the way.
Peter Lynch was a legend who beat the market in a way few greats could do. From 1977 to 1990, he averaged a 29.7% return with the Magellan Fund. It was the best-performing fund of the 1980s.
And yet, Lynch made mistakes. He jokingly admits to it often. He just did mistakes better than most investors too. Lucky for us, he had a knack for simplifying the difficulties of investing.
His ability to cut to the heart of what it takes to make money, in the long run, is refreshing. And yet it’s still mostly ignored because the riches don’t come quick enough.
As a guest on Wall Street Week, in 1990, he explained why patience is key. It was one of several common mistakes he covered during the segment. Be it market timing, predictions, not knowing what you own, or lack of effort, the mistakes are universal. Lynch’s take is a good reminder of the trouble we can get ourselves into at times. Continue Reading…
Charlie Munger is the lessor known half of the partnership team that built Berkshire Hathaway. Prior to that, he was a lawyer, before giving up law to run his own investment partnership.
He started Wheeler, Munger & Company in 1962. The partnership was wound up in 1975. Back-to-back 31% losses in 1973 and 1974 made investors squeamish and in need of capital. Yet, despite the losses, Munger outperformed the market, earning a 19.8% annual return over the 14-year period (compared to 5% for the Dow).
Munger teamed up with Warren Buffett three years later (1978) as vice chairman of Berkshire. In his spare time, he chairs the Daily Journal, designs buildings, and plays the part of a walking, talking encyclopedia. He’s a learning machine who built his own system of mental models to reduce errors in this complex world. His unique view of uncommon sense, as he calls it, can be seen in how he invests.
Extreme concentration and inaction best describe Munger’s approach. He’s comfortable with only three or four wonder businesses in his portfolio. That’s far short of the popular broad diversification strategies recommended today.
Except, extreme concentration is not for everyone. First, finding a handful of wonderful companies worth owning is never as easy as it sounds. Someone not skilled in the art is likely to find awful companies more often than wonderful ones. Continue Reading…
Purposely losing money in the stock market seems like it should be an easy task. It turns out it takes some luck to lose money in the market. The same goes for making it.
Michael Mauboussin defines pure skill-based activities as those where you can lose on purpose. Chess is pure skill. It takes years of learning and practice to become just good at chess. However, a master chess player can lose on purpose to anyone.
Whereas the lottery is pure luck. It’s a random draw. You can pick a series of numbers and hope to lose but there’s always a chance you get lucky and win.
Investing falls somewhere in between pure skill and pure luck because the amount of noise in the system makes it hard to lose (or win) on purpose in the short run.
A good example of this is an interesting experiment run by John Rogers and his team several years ago: Continue Reading…
Ben Graham often explained the difference between investors and speculators.
An investor looks for investments that provide safety and a solid return. A speculator tries to profit off market moves.
Edwin Lefevre had a similar view. Though, he added a third option for good reason. He separated gamblers from speculators because he saw a pattern of gambling emerge during bull markets.
Here’s how he defined each following the 1929 crash: Continue Reading…