Novel Investor

Had you bought the S&P 500 on January 1st of any year since 1922, 68% of the time you’d have more money one year later. Using the Dow produces similar results — roughly 68%.

Both those stats ignore dividends, by the way, which would help improve those odds.

The idea behind it should set aside the concern of buying at a market top, only to sit at a loss for any number of years. It happens. No amount of market timing will prevent it. And worrying about it, based on those odds, appears to be overrated.

It’s interesting that those numbers don’t change much if you look even further back in time. Which is exactly what Edgar Lawrence Smith did: Continue Reading…

Edgar Lawrence Smith concludes his classic book with the importance of “Investment Management.” I don’t know how original this concept was in 1924, but investment management is exactly like it sounds. Anyone who’s read a few investing books should recognize the principles Smith lays out since it fits the basic concepts of investment planning today.

Obviously, the big difference between then and now is that most investors are analyzing funds or strategies instead of individual stocks and bonds. And analyzing might be an exaggeration.

Smith’s point falls under the Peter Lynch maxim of “Know what you own” and keep a watchful eye over it.

But first you need a sound plan. He lays out the case for management as an ongoing effort to balance a portfolio between stocks and bonds based on whatever the current environment warrants.

Then he expands into having a plan for the long term (including the next generation), the importance of diversification, and understanding the limits of what’s possible.

Here’s how Smith broke it down: Continue Reading…

It’s time for another reading update. Last quarter’s slump got fixed…I think, mostly diving into a couple of old books and digging up dirt on Henry Singleton.

Here’s what I’ve been reading the past three months: Continue Reading…

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…