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Weekend Reads – 6/23/23

June 23, 2023 by Jon

Quote for the Week

We do pay attention to what’s going on; we read extensively; we listen to what our friends in the business say, what the sell side people say, what people on television say. All of that is input into the way we think about things. But, our judgment is that the market is pretty good about incorporating the present state of affairs into stock prices or bond prices. And so, as I’m fond of telling the analysts, if it’s in the newspapers, it’s in the price. So you really need to understand what isn’t in the price, what isn’t being discounted, what events can happen that will lead the market to think differently about things. — Bill Miller (source)

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The Common Traits in Every Bubble

June 21, 2023 by Jon

Euphoria and ruin are inherent in markets. There’s a long history to back it up, as John Kenneth Galbraith explains in A Short History of Financial Euphoria.

All it takes is an idea — it doesn’t have to be a good one — grounded in reality, along with rising prices to get the ball rolling. But if speculative euphoria takes hold, it’s because imagination runs wild with the possibilities brought by higher prices.

In the book, Galbraith relayed three common traits in every speculative episode:

  1. New Innovation: every episode is driven by something new and exciting that catches the public’s imagination. The stories around it are rich in imaginative possibilities but light on realistic ones. Financial innovations are just as enticing as technological ones. But financial innovations turn out to be less innovative than first thought.
  2. Debt: leverage against assets scaled to excess helps keep prices aloft.
  3. Crash: it always ends in collapse and ruin. The designers and promoters once labeled as geniuses are condemned. Investigations follow, scrutinizing the innovation, debating new rules and regulations, and placing blame, though not on irrational speculation.

It also requires people. Financial memory loss and our ability to link money to intelligence keep the cycle alive. Continue Reading…

Weekend Reads – 6/16/23

June 16, 2023 by Jon

Quote for the Week

While the classic growth companies may continue to generate new sources of earning power, the question is: Can they do this rapidly enough to justify the valuation placed on their current earning power?

One can repeat the question just asked: Is a growth rate triple the potential growth of the economy sustainable indefinitely? If a company can double its earnings over the next 6 years but then needs 10 years before its earnings double again—and perhaps 15 years the next time—then its present P/E ratio will fade with the passage of time. In other words, the price will rise more slowly than the earnings.

And at every moment the investor runs the risk that a change in management, a spry competitor, a shift in customer preferences, or a fundamental economic or social change may slow earning power a lot faster than anticipated. Admittedly, pleasant surprises may come along too, but 40 times earnings already anticipates those. — Peter Bernstein (source)

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Men and Rubber: The Story of Business by Harvey Firestone

June 14, 2023 by

Men and Rubber book coverBuy the Book: Print | eBook

Men and Rubber tells the story of the early automobile industry and how Harvey Firestone built a small tire company into a leader in the industry. His autobiography offers timeless insights into starting and running a business.

The Notes

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Weekend Reads – 6/9/23

June 9, 2023 by Jon

Quote for the Week

Financial markets, then, are volatile and unpredictable. Importantly, the markets themselves are far more volatile than the underlying businesses that they represent, which collectively account for their aggregate market capitalization. Put another way, investors are more volatile than investments. Economic reality governs the returns earned by our businesses, and Black Swans are unlikely. But emotions and perceptions — the swings of hope, greed, and fear among the participants in our financial system — govern the returns earned in our markets. Emotional factors magnify or minimize this central core of economic reality, and Black Swans can appear at any time. — John Bogle (source)

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How to Stop Being Your Own Worst Enemy (in Investing)

June 7, 2023 by Jon

The most overlooked aspect of investing is behavior. Instead, we focus on intelligence, timing, forecasting, and a host of other things we believe carry more weight in the returns we earn. Some of it matters, but not nearly as much as we hope.

Of course, Ben Graham tried getting the importance of behavior across decades ago. He plainly explains it in the introduction to The Intelligent Investor: “For indeed, the investor’s chief problem — and even his worst enemy — is likely to be himself.” If you can overcome yourself, you’ll be better off than most investors.

Here’s the thing.

Humans have been hardwired over the centuries with quick natural responses that enhanced our survivability. Thousands of years ago, survival required focusing on what’s around the corner instead of what’s far off in the distance. So we became great at leaping to the first conclusion rather than thinking things through.

That works great if we want to avoid being mauled by an animal, but works terribly if we want to survive in the stock market. Simply, human nature hasn’t kept pace with our changing environment. Continue Reading…

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