Novel Investor

Compounding investing wisdom...

Fred Schwed Jr.: The Dream Market

by Jon

Fred Schwed Jr.’s classic, Where are the Customers’ Yachts? was first published in 1940. The title was borrowed from a quip William Travers made in the late 1800s.

As the story goes, Travers was with some friends in Newport to watch a boat race. After learning several boats were owned by Wall Street brokers, he asked, “Where’s the customer’s yachts?”

Schwed’s book was one of the first to mix humor with finance to warn people of Wall Street’s shortcomings…starting with the title. Wall Street has a history of enriching itself at the customer’s expense. But he didn’t stop there. He knocked Wall Streeters for their continual need to predict the future — and continuously getting it wrong.

However, the book wasn’t the first time Schwed blasted Wall Street for its shortcomings. A short piece, he wrote, in the March 1939 issue of Forum and Century magazine offered a glimpse of what was to come.

Schwed went after Wall Street for the endless confidence in knowing what happens next, the ignorance of uncertainty, the endless search for patterns in the market, CEOs playing the blame game, and the customers for being gullible. Continue Reading…

Quarterly Reading – Spring ’22

by Jon

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

  • The Art of Wall Street Investing – John Moody’s classic offers a glimpse of what investing was like prior to 1906. Bucket shops, stock pools, and get-rich-quick schemes were regular features. But the common sense investing principles outlined in the book still work today. (notes)
  • Decision Under Uncertainty: Drilling Decisions by Oil and Gas Operators – The book deals with decision-making where uncertainty exists in oil drilling but translates to other business and investing decisions. The biggest takeaway is how to think about probabilities in an uncertain environment where an unlucky sequence of outcomes can lead to ruin. (notes)
  • Wiped Out: How I Lost a Fortune in the Stock Market While the Averages Were Making New Highs – An anonymous author tells his experience “investing” in the stock market from 1957 to 1964. He went from never investing in stocks, or even gambling at casinos, to trading $62,000 down to nothing. It’s a brutally honest take on speculative behavior.
  • Of Long Term Value & Wealth Creation from Equity Investing – Bharat Shah, an Indian investor and director of ASK Group, wrote this book on finding quality compounders. He focuses on companies showing signs of value but also long-term growth and earnings quality. The book is only available in PDF format.
  • The Great Depression: A Diary – Benjamin Roth kept a detailed diary of his experience and observations of what was going on around him during the Great Depression. His collection of diary entries offers a daily snapshot of the growing pessimistic view of the economy, markets, and daily life. I’ve only recently started it but the book is hard to put down.

Continue Reading…

Bill Miller’s Biggest Loss

by Jon

It’s impossible to know in advance how any investment will turn out. Only in hindsight will you know for sure. So it’s likely that you’ll always put too much or too little money into any one investment.

This is why position sizing — the amount held in one investment in relation to the total portfolio — is so difficult yet important. Especially when it comes to losing money. Having too much money in a single investment that turns out badly can cost you dearly.

Bill Miller relayed this lesson when he talked about one of his biggest losses. It involved Enron.

Enron was a Wall Street darling, throughout the 1990s, that had a magical ability to grow earnings at will. Its stock hit a peak of $90 per share in the summer of 2000. But the price dropped over the next year or so.

Throughout the decline, the CEO, Kenneth Lay, assured shareholders and employees that the company would rally, urging them to buy more Enron stock, while quietly selling his shares.

The magic turned out to be accounting fraud. Continue Reading…

Wise Words from Ben Graham

by Jon

The 1929 crash was a defining moment for Benjamin Graham. His brief track record before the crash earned 25% returns for his clients, beating the Dow by 5%. But leverage got the best of him in 1929.

His fund lost 70% from 1929 to 1932 versus the Dow’s 80% loss — one of the worst ways to beat the market. The loss had a dramatic effect on his views toward investing.

It also meant he went unpaid during the period. His fee structure was set up so that he only got paid if his clients made money. To supplement his lack of income, Graham took a book deal to write Security Analysis. It was the first book to lay out a framework for sound investing.

Graham made his clients whole by 1935 but he emerged from the crash a much more conservative investor. He swore off leverage and made risk — losing money — his top priority.

In 1949, he wrote The Intelligent Investor, which laid out three important concepts. His parable of Mr. Market taught that you can use market fluctuations to your advantage or your peril if you get too caught up in it. His concept of margin of safety adds a layer of protection from unexpected risks in investing. The third is a bit more obvious but worthy of a reminder. Investing is about buying pieces of a business not pieces of paper. Continue Reading…

3 Sources of Investor Advantage

by Jon

Charley Ellis once described the three ways in which investors can beat the market. He said, “One is physically difficult, one is intellectually difficult, and one is emotionally difficult.”

You can work harder, put in more hours, and outwork everyone else. You can be smarter, see the future differently, and better identify when the market is wrong. You can be better behaved, take a long-term investment approach, and hold on.

Unfortunately, most investors focus on the first two. They try to outwork or outthink everyone while overlooking better behavior. If they only realized that more effort and intelligence still requires better behavior to succeed at investing. Every investor walks the emotionally difficult path.

Bill Miller once shared a similar line of thinking when he expanded on Buffett’s idea of a circle of confidence. If investors are true to their abilities, they should not only focus on areas they understand well but have a competitive advantage over other investors. Continue Reading…

A Too Familiar Tale of Investing in Bull Markets

by Jon

Similar stories play out in every bull market. Someone somewhere begins investing for the first time. First in mutual funds until they get a taste for better returns.

This story, in particular, begins in 1957. A lone investor makes his first foray into the stock market. An inheritance from his father’s death left him with more money than he needed, so where to invest it? The family suggested mutual funds for the long term. So that’s what he did.

His returns were average.

But the market was booming. The post-war boom struck the 1950s with one of the longest bull markets ever. People who never invested before were drawn to the stock market because of the possibility to turn meager savings into a small fortune. Our lone investor included.

It started with a conversation with his cousin. “Do you have money in the market?” “No, except mutual funds.” “You should talk to my broker.”

And so it began. Continue Reading…

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