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Don’t Overemphasize Volatility

May 25, 2022

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Jon

Markets go through points in the cycle where it’s as if investors forget we don’t know what happens next. They’re sure of the outcome.

Unfortunately for investors, those points are at the worst possible times. When they’re certain things will stay better forever and certain things will only get worse.

Then the market teaches them a lesson. Heightened volatility is the wake-up call that uncertainty abounds.

Volatile markets like today are normal but occur just far enough apart that investors forget what it felt like the last time it happened. Each time it’s accompanied by a worrying event and gives us an excuse to try to avoid it.

But when you overemphasize volatility, you miss out on the good it offers. Nobody understands this better than Peter Bernstein: Continue Reading…
Closer to the Bottom Than the Top

May 20, 2022

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Jon

The irony of investing is that it typically works out best when markets look their worst. Currently, things don’t look good.

So with that in mind, let’s find out where we are in the market cycle. To paraphrase Howard Marks, if we know where we are in the cycle, we can better prepare for what comes next.

I thought I’d approach this from a different angle. Rather than guess what the Fed might do or where inflation and interest rates are going based on past history and how it might affect the market today, let’s look at “irrational” stock prices.

The best way to track irrationally priced stocks is with an old Ben Graham strategy that has largely gone out of style. He looked for companies trading below their liquidation value. In rational markets, that shouldn’t happen. Yet, it does.

Graham’s “Net-Net” strategy looks for companies with a market cap below its net current asset value. Current assets are typically the most liquid assets a company has: cash, money owed to the company (accounts receivable), and finished products not yet sold (inventory). And the net current asset value is found by subtracting total debt from current assets. Continue Reading…
Peter Lynch’s Rule for Dealing with Mistakes

May 18, 2022

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Jon

Investing mistakes are unavoidable. Everyone makes them. So it’s not a matter of if, but when. The question is what will do once you realized you’ve made a mistake?

Peter Lynch has the answer. In a 1980 appearance on Wall Street Week, Lynch highlights mistakes he’s had first-hand experience with like not knowing what you own or trying to catch a falling knife while ignoring fundamentals.

But Lynch has a rule for dealing with his mistakes. The instant he realizes he’s made a mistake, he gets out.

Unfortunately, many investors turn one mistake into many. They compound the problem.

Our first reaction toward losses is to make the money back. So the next mistake starts with wanting to get back to even. Which rarely goes as planned. Instead, we turn a small loss into a bigger loss. But that’s compounded by the opportunity cost of putting those dollars to work somewhere else. Continue Reading…
Wise Words from Peter Bernstein

May 12, 2022

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Jon

Peter Bernstein understood markets better than most. Decades of experience gave him an inside look at the complex interplay between investor behavior, risk, and uncertainty.

Bernstein knew that realized risk was a byproduct of investors’ behavior. Behavior that is often driven by our experiences or lack thereof.

Investors usually go wrong the moment they are certain of what comes next. Probabilities, not absolutes, are the best tools we have to make investment decisions. Yet, the riskiest moments in markets are when investors en masse expect a similarly certain future.

Bernstein knew that risk results from not knowing the future. Uncertainty rules but risk isn’t always a bad thing. Surprises happen both good and bad.

Risk is simply the outcome we don’t expect. The question to ask, according to Bernstein, is what if you’re wrong? Are you prepared for the consequences of that?

Survival is key. So risk is something to be protected against and diversification is the answer. But in so doing, diversification seizes surprising opportunities elsewhere.

Most important, Bernstein had a way with words. His talent to simplify complex ideas, like those above, into a short sentence or two was impressive. I thought I’d share a few.

Here’s Bernstein: Continue Reading…
The Great Depression: A Diary by Benjamin Roth

May 11, 2022

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Buy the Book: Print | eBook

Benjamin Roth was a lawyer in Ohio who realized early in the Great Depression that he was living through a financially significant time and wanted to learn from it. His diary recorded the effect the Great Depression, the economy, and financial markets had on people.

The Notes

Continue Reading…
Investing Lessons from the Great Depression

May 6, 2022

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Jon

Benjamin Roth kept a diary throughout the Great Depression. His diary was turned into the book The Great Depression: A Diary which offers a unique take on the time period from a financial perspective.

Roth realized early that he was witnessing a major financial crisis and wanted to learn from it. So he started journaling in 1931. He jotted down his thoughts on stories he heard from clients and events he observed. He tracked the stock market, local stock prices, and the economy both locally and nationally.

Three big things in Roth’s diary stood out.

First, one thing Roth repeated over and over was the lack of cash to buy bargain stocks. Nobody had money. The combination of a 90% market decline and widespread bank failures destroyed people’s savings.

Even the banks that didn’t fail basically froze their customer’s savings accounts. Limits were set on how much money a customer could withdraw in a day. In some cases, it was as low as 5% of the money in their account. Continue Reading…

Don’t Overemphasize Volatility

Closer to the Bottom Than the Top

Peter Lynch’s Rule for Dealing with Mistakes

Wise Words from Peter Bernstein

The Great Depression: A Diary by Benjamin Roth

The Notes

Investing Lessons from the Great Depression