Novel Investor • Page 6 of 13 • Compounding investing wisdom...

Cartoons of the 1929 Crash

June 5, 2020

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Jon

Newspapers have limited real estate. It should be no surprise that the stock market failed to make the front page every day of 1929. It was competing against news about prohibition, bootleggers, tariffs, and politics for the top spot.

The market really only dominated the headlines for about two weeks out of the year. The big week was at the end of October. The rest was sporadically spread out during the year.

But in those two weeks, editorial cartoonists wonderfully captured the speculative phenomenon of the market bubble and crash. The gambling nature, the easy money mentality, mistiming the top, the promises never to do it again…until next time, they captured it all.

After digging through the headlines of 1929, the cartoons were too obvious to be ignored, so I grabbed some to share. Take a look: Continue Reading…
How to Take a Chance by Darrell Huff

June 3, 2020

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Buy the Book: Print

Darrell Huff offers an introduction to the theory of probability that you can find in all aspects of life. He weaves in bits of humor and literature to explain the different concepts with real-life examples of coin tosses, card games, roulette, and dice that should help you avoid expensive mistakes.

The Notes

Continue Reading…
Timeless Lessons from Bubbles

May 29, 2020

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Jon

Every market bubble reveals important lessons after it bursts. Some of those lessons are one-off, tied to a specific bubble. The important lessons emerge each time prices reach euphoric heights.

John Kenneth Galbraith highlighted two such lessons from the 1920s bubble during a Congressional Hearing in 1979. His first is discussed often (so I’ll keep it short). His second can be found outside bubblier times too.

A sound idea carried too far

Prices first went up because of good earnings. Then they took leave of reality. The market was taken over by people for whom the only important fact was that prices were going up. Their buying then put up the prices but with the certainty that when the supply of such speculators — and gulls — ran out, as eventually it would, the upward movement would come to an end and prices would collapse in the rush to realize and get out. This, to repeat, is the classic speculative sequence.

If the only reason for buying a stock is because the price went up…buyer beware. Continue Reading…
The Uncomfortable Truth

May 22, 2020

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Jon

What’s the biggest determinant of investing success? Smarts, information, strategy, or skill are all worthy possibilities.

But one stands out above all the others:

The truly successful stock market investors of history have been no more intelligent than most less successful investors. In most instances — they have had no better sources of information than other investors. The qualities they have had in common have rather been qualities of temperament, which is why no one has ever found out how to get rich by taking courses or reading a book or reading articles (including this one). But those temperamental qualities are crucial and relate to the points I have been trying to make here: the road to success in investing is paved with independence of spirit, decisiveness, and the courage of one’s convictions. — Peter Bernstein

The market naturally triggers emotional responses that lead to mistakes. Those best equipped to handle those triggers are more likely to succeed.

That shouldn’t come as a surprise. Most things in life worth achieving require mental toughness to get through the obstacles that are certain to arise. And investing is full of obstacles. Continue Reading…
Warren Buffett: The Best Reason for Selling

May 20, 2020

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Jon

In a perfect world — assuming everything goes as planned — the best time to sell an investment is at its peak price. In reality, that’s called luck.

That’s why selling is an imperfect art. The overwhelming outcome for most sell decisions is too soon or too late.

Warren Buffett actually recognized it early on to never expect perfection:

Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results. The better sales will be the frosting on the cake.

It’s a byproduct of Ben Graham’s concept of a margin of safety. A wide margin of safety (between price and value) leaves room for error but you still make a profit. Continue Reading…
Wise Words on Forecasting

May 15, 2020

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Jon

In a matter of two months, a miraculous number of people became experts in virology in order to predict something they know nothing about.

That’s the state of the market today. It also happens to be the state of the market every day — minus the new armchair virologists.

Investors want to know what happens next. We take comfort in thinking we know — especially in extremely uncertain times like these.

The problem lies in predicting a multitude of factors, their effects on businesses, on markets, on people’s behavior, and any randomness that might occur in the process, all while staying unbiased.

In short, we’re not great at predicting the future. In fact, we’re exceptionally bad at predicting the major turning points that have a huge impact on markets.

Yet, investing is about the future so we can’t exactly get away from it. As investors, our decisions always involve some level of uncertainty. Continue Reading…

Cartoons of the 1929 Crash

How to Take a Chance by Darrell Huff

The Notes

Timeless Lessons from Bubbles

A sound idea carried too far

The Uncomfortable Truth

Warren Buffett: The Best Reason for Selling

Wise Words on Forecasting