Quote for the Week

It was the publication of E.L. Smith’s little book entitled, Common Stocks as Long-Term Investments. His study showed that, contrary to prevalent beliefs, equities as a whole had proved much better purchases than bonds during the preceding half-century. It is generally held that these findings provided the theoretical and psychological justification for the ensuing bull market of the 1920’s. The Dow Jones Industrial Average (DJIA), which stood at 90 in mid-1924, advanced to 381 by September 1929, from which high estate it collapsed — as I remember only too well — to an ignominious low of 41 in 1932.

On that date the market’s level was the lowest it had registered for more than 30 years. For both General Electric and for the Dow, the high point of 1929 was not to be regained for 25 years.

Here was a striking example of the calamity that can ensue when reasoning that is entirely sound when applied to past conditions is blindly followed long after the relevant conditions have changed. What was true of the attractiveness of equity investments when the Dow stood at 90 was doubtful when the level had advanced to 200 and was completely untrue at 300 or higher. — Ben Graham (source)

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Quote for the Week

I used to talk about the crash in October 1987 without explaining what it was and I do still teach a seminar in the economics department in the Fall. I started talking about what happened in October 1987 and I looked around the room and I realized that I think the students were three or four years old in 1987 and weren’t yet reading The Wall Street Journal.

So, just to give you a little bit of context, the crash was really an extraordinary event. According to my calculations it was a twenty-five standard deviation event. One standard deviation happens one draw out of three, two standard deviations one out of twenty, three standard deviations is one out of one hundred. An eight standard deviation event happens once out of every six trillion trials. You can’t come up with a number to describe the twenty-five standard deviation event; it’s just too large a number, I think, for any of us to really comprehend. In essence, this collapse in stock prices — the one-day collapse in stock prices — I think in the U.S. the price was, depending on which index you were looking at, were down 21-22% in a single day. Interestingly, most major markets around the world were off by a similar magnitude. This one-day collapse in stock prices was a virtual impossibility. Of course, this was just a change in stock prices; it wasn’t related to any fundamental change in the economy or any fundamental change in corporate prospects. It was just a financial event. — David Swensen (source)

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Quote for the Week

The truth is: Investing is not easy; making money isn’t easy. How can it be easy? Everybody wants to make money. It is a very competitive activity. But if you are disciplined, if you study, and if you can keep your emotions under control, then you can do these things. But one of the real keys is to keep your emotions under control. Everything in the environment conspires to make us do the wrong thing, to buy when things are going well and prices are high — and to sell when things are going poorly and prices are lower, which is the exact opposite of what we should do. But it all comes from emotion. We have to resist. — Howard Marks (source)

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Here’s what I’ve been reading for the past three months:

• The Buffett Essays Symposium — It’s an annotated transcript of a 1996 symposium held alongside the release of The Essays of Warren Buffett. Buffett was in attendance, of course, along with Charlie Munger and others to discuss issues on corporate governance, accounting, investing, M&A, and more. The book is a nice supplement to The Essays. (notes)
• How We Know What Isn’t So — Thomas Gilovich looks at human judgment and why we fall prey to mistaken beliefs and fallacies. He uses research and examples to show how cognitive biases, like the hot hand fallacy, the Barnum effect, and others, cause errors in decision-making. He closes the book with suggestions on how best to avoid erroneous beliefs. (notes)
• Make Something Wonderful: Steve Jobs in His Own Words — The book is a curated collection of Steve Jobs’s emails, writing, speeches, and more from throughout his life. You get his thoughts on creativity, technology, and business, and how those views changed over time. Overall, the book is a history of his life. Copies are free at the Steve Jobs Archive. (notes)
• The Victorian Internet: The Remarkable Story of the Telegraph — Tom Standage tells the story of the invention of the telegraph. From the first optical telegraph invented in France to the electric telegraph, the new invention cut communication time from days to minutes and changed the world. The book also offers some broader lessons on how the public views new inventions, first with skepticism then enthusiasm, and how early adopters drive the technology forward. Notes to come.

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