Novel Investor

Compounding investing wisdom...

Ben Graham on the Trouble with Dollar Cost Averaging

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The most important argument in favor of dollar cost averaging — the only one that matters, in my opinion — is that it reinforces scheduled saving. And since most people get paid on a regular schedule, that makes it convenient too.

Of course, most arguments for and against DCA devolve into specifics around things like strategies or allocations. The specifics typically come with examples that make two questionable assumptions.

The first involves assumptions based on past performance, as it relates to the future. Unfortunately, the future isn’t guaranteed to look anything like the past.

The second is that we’re all rational actors.

Conveniently, Ben Graham tackled this in a paper devoted to new (at the time i.e. 1962) saving plans dedicated to buying stock (pensions plans, CREF, variable annuities, and DCA via mutual fund companies): Continue Reading…

“Cheap” Versus “Dear”

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It’s going to be a brief one since I’m traveling. No posts next week for the same reason.

While digging for stuff on Walter Schloss a few weeks ago, I found a short research piece he and Ben Graham helped on. The piece was published in January of 1951. It studied the performance of the “cheap” versus “dear” stocks in the Dow from 1914 to 1948.

It turns out the “dear” stocks outperformed “cheap” and the Dow in the first half of the period (1914 – 1931) in the run-up to the 1929 peak. But the “cheap” stocks extreme outperformance in the second half (1932 – 1948), drove it to outperform “dear” over the entire period.

The strategy implied is not something to use today but the explanation might sound familiar: Continue Reading…

Lessons from Three Ben Graham Speeches

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Benjamin Graham spent time throughout the 1940s and 50s lecturing about things he knew nothing about. The speeches came in the disguise of a “Market Outlook.” People wanted to know what would happen next. Graham’s response was typical:

The subject assigned to me for this afternoon is one about which, precisely speaking, I know nothing.

Those were the first words out of his mouth at a lecture given in November of 1952. Then he gave them a history lesson of sorts.

He repeated that in similar fashion in other speeches too. In 1942, inflation worries were the topic du jour heading into WWII. In 1950, people wanted to know how the second half of the century would turn out. In each case, Graham offered some lessons instead.

What follows are a few of those lessons from those three speeches mentioned, mostly without comment. Continue Reading…

Excerpts from the Latest Marks and Klarman Letters

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Howard Marks released his latest memo this week and Seth Klarman’s letter was leaked last week.

Marks’ Memo, titled “Political Reality Meets Economic Reality” covers just that. He spends the time on the second and third order consequences on two worrying trends in politics: tariffs and anti-capitalist sentiment.

Politicians perfected the offer of easy solutions to complex problems because they want soundbites that quickly get you to “yes.” Diving into second and third level consequences ruins their soundbite and puts votes at risk.

The memo is worth reading for Marks’s balanced take. I’ll add that the Appendix on “The Tax System Explained in Beer” is not to be missed. Continue Reading…

Ben Graham’s Simple Strategy for Defensive Investors

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In January 1949, Ben Graham spoke before the New York State Bankers Association to encourage bankers to advise customers on sound investment policy. What surprised people then was his push for simplicity.

You can make investing as simple or complicated as you want. Simple strategies tend to require less knowledge, fewer decisions, and generally easier to manage. Complicated strategies tend to bring added costs (higher fees and behavioral costs) and can introduce unknown, often uncompensated, risks.

Graham’s simple strategy: divide your portfolio between government bonds and a diversified basket of common stocks or “investment — fund shares — instead of a selected common stock list.” He purposely left out corporate bonds, preferred stocks, and the like, as unneeded risks for a defensive investor.

If you’re not familiar, Graham divided investors into two categories — defensive and aggressive — defined like this: Continue Reading…

Some Book Notes

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Several years ago, I read Mortimer Adler’s How to Read a Book after seeing it discussed on Farnam Street. A book about reading a book sounds like a joke, I know, but it’s surprisingly not.

From an early age we’re taught to read, but not how to learn and fully understand something from reading. The book is an instruction manual on that process.

I won’t rehash it all here (read the book if you’re interested), but I was already doing part of that process like marginalia — highlighting, underlying, circling keywords, notes in the margins, etc.

I highlighted and underlined the hell out of that book but never bothered to summarize or go back through it to take notes. But I quickly recovered on the next book — marginalia, summary, notes, the works — and maintained some consistency after that. Continue Reading…

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