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Jean-Marie Eveillard explains why value investing was the reason for his long-term success. From his introduction to Ben Graham to his transition to a Buffett-style approach, he shares the investing principles and experiences that led to a successful career.
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After a stock market decline, people may perceive more risk than before when, in fact, the decline may have taken some of the risk out of the market. I haven’t quantified this, but I believe risk perceptions probably move around more than risk preferences do. — Robert Shiller (source)
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The first quarter of 2023 shows how far markets can swing in such a short time. In fact, double-digit moves in a single month are common even for market indexes. But how you react to those moves matters.
Unexpected events in March are a perfect example. Concerns about the health of a bank had a cascading effect. News of depositor withdrawals at Silicon Valley Bank set off further withdrawals, and finally a rush for the exits. The bank failed because depositors panicked.
Of course, that news tanked the bank’s stock, set off rumors of other banks at risk, and the financial sector dropped 14% in two weeks and a 10% loss in March.
The episode is a lesson in itself. People make up markets. A shift in their emotions moves markets. The most important part of investing is keeping your cool when the markets get crazy because emotions often undermine long-term returns.
A note before getting to the 2023 numbers. The asset class, sector, international markets, and emerging market return quilts are up-to-date with the first quarter returns. Hit the links for each one. Continue Reading…
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Hindsight occurs when a surprising event takes place and the surprise is very brief, replaced almost immediately by a need to make sense of it. The individual has learned something from the event. For example, if there were two football teams that you considered equally-matched, and one of them trumps the other 5-0, they are no longer equally strong in your mind. One of them is clearly better than the other. This makes sense of their victory. It also makes it virtually impossible for you to re-construct that, earlier, you thought they were equal.
Now, we think that the team that actually won “had to win.” Why did it have to win? Because it won. It won because it was stronger. How do we know it is stronger? Because it won. This is hindsight. It has a huge effect on our thinking, it has a huge effect on investing behaviour, and it has a very pernicious effect, in that it teaches us something quite wrong about the nature of reality…
So, the pernicious effect of hindsight is that we get the sense, after the fact, that an event was predictable, so we get the sense that the world is predictable. We think the world makes sense, and that exaggeration of the coherence, consistency and predictability of the world means that we deny the real uncertainty with which we are faced in existence. And this denial of uncertainty in turn produces irrational action. — Daniel Kahneman (source)
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The authors tell the story of the Panic of 1907 and how fragile complex systems can be. The authors recount the events that led up to the panic, the actors that pushed it to the brink, the efforts taken to halt it, and the aftermath that led to the creation of the Federal Reserve.
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The necessity to distinguish between the short run and the long run is one of the most difficult tasks the businessman faces — and yet perhaps it is the most essential of his tasks. At the same time, however, how does one determine whether the events of the past few weeks or months are just random blips or early harbingers of a more fundamental shift in the long-run environment? If short-run decisions made without regard to the long run are the sure road to disaster, we must also never forget that the long run is nothing more than an extended series of shorter-run variations. — Peter Bernstein (source)
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