It was considered common knowledge, prior to 1924, that stocks performed better than bonds during periods of inflation and bonds were better than stocks under deflation. As far as “truths” go, it’s not that outlandish. It almost makes sense.
Only, nobody bothered to test the assumption until Edgar Lawrence Smith came around. He tested it and came to a surprising conclusion for the time. Stocks, for the most part, do better than bonds during periods of inflation and deflation. He concluded it was because retained earnings, reinvested back into a business, increases the value of the company which eventually gets reflected in the stock price.
His book, Common Stocks As Long Term Investments, spread the news far and wide, becoming the new common knowledge. But it was shortlived.
Sometime between publishing the book and October 1929, some investors took Smith’s news to mean something else. “For the most part” was replaced by “always.” As in, stocks,
for the most part always, do better than bonds…
Investors and the market ate it up. And it ended horribly in the ’29 crash.
Two basic lessons come out of this episode. Testing “truths” can lead to facts that reframe how people think about something and the narrative around facts can be warped, creating problems. Continue Reading…
Michael Burry’s bet against the housing bubble began with WorldCom bonds. Had he never learned from his WorldCom bet, it’s unlikely his housing bubble bet pays off so big.
Here’s the thing, Burry made money on WorldCom bonds. But he missed out on a lot more. So he asked why?
I was onto WorldCom pretty early and they went from investment grade to bankrupt overnight. And so, I ended up doing okay with their bonds on the way back up. But, I wondered why didn’t I make more money on this? And so, I wasn’t a short. I don’t like to short equities… So I basically noted though, it went investment grade to bankrupt overnight. And it hit me. That’s the way to short companies that you think look so gilded now, but you think might tumble, as a result of asymmetric risk taking — so, especially leveraged companies. And I noted that there were a lot of these highly-rated, super leveraged companies where you could buy credit — because you can’t buy credit default swaps on junk or stuff that’s below investment grade. So, that was how I came to investigate CDS’s. So I bought books.
The right question drove Burry to learn about credit default swaps. Then he sat on the information.
As he explained in his FCIC interview, a look into home builders was the next thread that eventually led to his big short: Continue Reading…
Stan Druckenmiller once said, “Every great money manager I’ve ever met, all they want to talk about is their mistakes. There’s a great humility there.”
So what’s the benefit of constantly talking about their mistakes? For one, they embrace the inevitable.
Investing is just a long series of decisions where some end in gains and others end in losses. If you’re doing it right, the gains outweigh the losses in the end, hopefully, by a large enough margin that your goals are reasonably satisfied.
In other words, every investor makes mistakes. Those that don’t are lying. That’s the uncomfortable truth. Those that go on to be great investors, learn this through experience…and apparently love to talk about it.
Howard Marks, in his latest book, shared a great excerpt by Peter Bernstein which drives home the importance of this realization and why it matters: Continue Reading…
Gerald Loeb’s classic might as well be called The Battle for Investment Survival and other writings. The original was published in 1935.
Since then, it’s been revised so many times that it’s doubled in size. In the copy I read, the other writings made up half the book.
The writings are a collection of articles and lectures by Loeb that repeats his main points on investing and strays into a number of other topics — taxes, retirement, job advice, travel, architecture, and a recipe for ice cream soda. So because of that, I purposely left most of it out of the notes.
That said, Loeb is highly quotable, so here are a few lines that stood out: Continue Reading…
Investing is more art than science because psychology affects prices. That’s what makes investing difficult.
Yet, the difficulty is what most investors underestimate at first. Gerald Loeb points out the difficulties of investing throughout his book, The Battle for Investment Survival, before finally summarizing it:
The most important things any reader of these chapters can learn are likewise that investment and speculation are difficult, not easy; uncertain, not clearcut; treacherous, not logical. Here, more than anywhere in the world, is the land of illusion. Things are not what they seem. Two and two don’t always make four. “Stocks were made to sell.” Caveat emptor —”Let the buyer beware.”
And that’s the first of many lessons from the book. Here’s another. Losing is part of the battle: Continue Reading…