Quote for the Week

You have all these smart people out there. The money doesn’t go to the people with the highest I.Q. There would be a very poor correlation between I.Q. and investing and results. And you say to yourself why does somebody with a 500-horsepower motor only get 100-horsepower out of it? And I would say that if you look at the intellect as being the horsepower that’s available, but you look at the output as reflecting the efficiency of that motor, it is rationality that causes the capacity to be translated in output.

Now what interferes with rationality? It’s ego. It’s greed. It’s envy. It’s fear. It’s mindless imitation of other people. I mean, there are a variety of factors that cause that horsepower of the mind to get diminished dramatically before the output turns out. And I would say if Charlie and I have any advantage it’s not because we’re so smart, it is because we’re rational and we very seldom let extraneous factors interfere with our thoughts. We don’t let other people’s opinion interfere with it. We don’t get– we try to get fearful when others are greedy. We try to get greedy when others are fearful. We try to avoid any kind of imitation of other people’s behavior. And those are the factors that cause smart people to get bad results. — Warren Buffett (source)

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When it comes to investing, it’s often what you don’t do that matters most. The best example of this is misbehavior.

Unfortunately, not nearly enough investors see it that way. And why should we? We’re bogged down with messages about owning the right investments for today’s environment. Which leads to forecasts and market timing. Two things we’re terrible at, by the way.

Besides, when patience and fortitude are cited as reasons behind investing success, it comes off as too easy…at first. A few decades of experience might challenge that perception.

Investing is a long-term game, that requires long-term patience at the risk of being constantly distracted from that effort. We’re tempted by headlines and market moves to act on a daily basis.

Sometimes the distractions work. We like stories and headlines offer simple explanations — that link cause with effect — for why the market did what it did that day.

It doesn’t matter if the story is wrong. Markets are too complex to pinpoint the sole reason behind a day’s action. Our simple brains prefer the stories because they present an illusion of control over the outcome and often fill in as a scapegoat for why we lost money. That’s better than the alternative. We prefer to believe that outcomes are controllable rather than being at the whim of chance. Continue Reading…

Quote for the Week

Someday I’m going to write a piece called “The Perils of Brilliance.” The times I have been most wrong are the times I thought I was most right. You asked me at the beginning about the things I’ve learned from all of this, and I have to repeat: It’s humility. I think the reason I’ve been able to survive 55 years in this business is because I developed humility, at least after 1958. It’s the only way to survive — not necessarily to be the top quartile — but survival is really the name of the game we’re playing with long-term considerations. — Peter Bernstein (source)

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Quote for the Week

As Justice Holmes pointed out, though, “Certitude is not the test of certainty.” What I believe will happen in financial markets and what ends up happening have no necessary relationship. The future is uncertain, and the returns investors earn will depend on the nexus of actions taken and how events unfold. Financial history provides just that: history. Its ability to inform how we think about the future and to affect how we position assets would be dispositive if it were not for the most important feature of capital markets: nonstationarity.

Nonstationarity refers to the degree to which the future does not resemble the past. If it were not for nonstationarity, we could just look to the past and unfailingly predict the future. The richest people would be those with the best databases. Librarians would be firing young aspirants to wealth on reality TV shows. Nonstationarity means that investment judgments are probabilistic and that even the best investment process will lead to undesirable results from time to time. Investment theorist Peter Bernstein noted that even if the expected value of the future were known with certainty, the standard deviation around that value would guarantee results that diverged from the averages, sometimes dramatically, and not always positively. — Bill Miller (source)

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